The year 2012 is coming to a close, leaving behind many problems. Most are man-made originating in politics.
Yet,
sadly, there are no major political leaders who have the credibility,
charisma and strength of character to garner the needed political
resolve to set their own nations or the world on the righteous path of
sustainable growth.
The re-election of US
President Barack Obama
helped a little. As I write, even if he is able to persuade opposition
Republicans in Congress to a deal to avoid the looming “fiscal cliff”
(self-inflicted arrangement involving US$600bil of indiscriminate tax
hikes and “sequester” cuts in military and welfare spending, bringing on
a 3% reduction in 2013 fiscal deficit), the resulting cuts and taxes
will invariably become a drag on growth estimated by most to be at least
1% of gross doemstic product or GDP in 2013.
The downside risk
to global growth is likely to be exacerbated by the spread of the
ongoing austerity to most advanced nations. Thus far, the recessionary
fiscal drag has been centred on the eurozone periphery and United
Kingdom. Latest indicators point to it spreading to the eurozone's core
(including Germany and France) and Japan.
This only confirms the
International Monetary Fund (IMF)'s contention that excessive
front-loading of fiscal austerity will “dim global growth prospects in
2013.”
The recent near simultaneous leadership changes in China,
Japan and South Korea offer East Asia a fresh opportunity for
reconciliation after a period of tension.
The region's three
biggest economies now appear to be confidently over the hump following
the Tokyo and South Korean elections last week and Beijing's leadership
“jockeying” resolved by last month. But, realistically, they continue to
face headwinds from a stumbling world economy.
North Korea's rocket launch last week adds to regional uncertainty. So does continuing unrest in Syria and the Middle East.
Critical to the well-being of nations is how they will use this opportunity to get their ties back on track.
Enter 2013
The year 2013 is a big step following a tough year. To me, six events had dominated:
(i) Europe held the world's fate in its unsteady hands for most of the year. It took the
European Central Bank (ECB) president Mario Draghi's
promise “to do whatever it takes to save the euro” to rid the sting out
of the crisis, with a later pledge of “unlimited” bond buying;
(ii) The impact of the war in Syria and Morsi's uneasy presidency in Egypt;
(iii)
Leadership transition in four of the world's five largest economies,
with “elections” in United States, France, Japan and China ushering
promises of new approaches to politics and policy making;
(iv) Serious political disputes in the East Asia seas;
(v) recent massive anti-Putin unrest in Russia; and
(vi) Serious transformation moves in Myanmar.
Today
they still continue to dominate. For the moment, it is too soon to tell
what their politics will bring in 2013. But one thing is for sure:
Global business gloom has deepened since the third quarter of 2012 and
is likely to persist.
I think there are some important lessons.
First,
investment risks have turned more political. US businesses today have
more than US$1 trillion in cash reserves and committed facilities
awaiting investment. For them, the nightmare is Washington staying
gridlocked, four days before falling off the “cliff.” Hopefully, like
before, the “game of chicken ends at the last minute.”
Second,
even a small economy like Greece (barely 2% of eurozone economy) can
have a material impact on global business sentiment as the “Grexit”
drama showed.
Third, the European episode pointed clearly that
governments can't cut and grow. One of the important takeaways from 2012
is that it is critical to always focus on the big picture and not be
grappled by event risks as these come and go.
As a US civil
rights activist once said: “For all its uncertainty, we cannot flee the
future.” So as we step into 2013, nations just have to embrace risks and
learn to manage and live with them. Scurrying away will not help.
OECD slashes forecast
Paris-based
rich nations' think-tank OECD (Organisation of Economic Co-operation
and Development) said in mid-December that its composite leading
indicators (CLIs) point to widely differing growth outlooks among its 34
member states.
Signs are of a modest pick-up in United States
and the United Kingdom, slowdown in Canada and Russia, and deepening
recession in the eurozone (including significant slackening in Germany
and France) and in Japan, and possibly Brazil.
OECD's CLIs are
designed to provide early signals of turning points between economic
expansion and slowdown, based on extensive data that have a reliable
history of signalling changes in activity.
Overall, barring worst
fears won't come to pass, combined OECD GDP will only rise 1%1.5% in
2013, not much change from 2012, with a modest pick-up to 2%2.5% in
2014.
Not unlike IMF's forecast, OECD growth will only expand if
eurozone deals seriously with its political and debt crisis, and the
United States finds a timely credible path to avoid the “cliff.”
Absent
such actions, world growth would slide into another downturn, with
deepening recession in the eurozone periphery, and contraction or
stagnation at the core and related advanced nations. What's needed is
“very careful policy steering”.
Eurozone manufacturing kept
contracting in November for a 16th month. Data show signs of recession
extending into 2013 as policymakers struggle to come to grips with the
crisis. For businesses and investors, the October Markit survey
concluded that in 2013 companies can expect challenging sales and
profits, causing many to focus on cost cutting.
Eurozone:
ECB slashed its forecast for the eurozone in 2013, signalling another
difficult year ahead. Echoing the IMF, it now expects growth of between
shrinking at 0.9% to a growth of 0.3% next year (minus 0.5% in 2012).
The
level of uncertainty was reflected in its first attempt to forecast
2014 at 1.2%. “Gradual recovery should start later in 2013” (GDP shrank
0.1% in the third quarter of 2012).
As the eurozone slipped into
recession for the second time in four years, Germany's growth slowed
down to 0.2% in the third quarter of 2012 (0.3% in the second quarter);
expectation is for it to expand 0.4% in 2013 (from 1.6% in 2012).
However, Germany faces a “favourable environment on the back of
expansionary monetary policy”. Expect some revival later on in the
second half of 2013, following better-than-expected jump in investor
sentiment in December.
Industrial output in Germany fell 2.4% in
October (minus 1.6% in September); France reported a 0.6% drop while
Spain and Portugal had increases of 1.2% and 4.8% respectively.
“France
is facing conditions much worse than Germany it's fast becoming aligned
with its southern neighbours of Spain and Italy.” Germany, given its
openness, cannot “prosper alone; it has a particular interest in the
welfare of its partners”.
Nevertheless, eurozone's peripheral
shows little sign of recovery: GDP continues to shrink because of fiscal
austerity, euro's excessive strength and severe credit crunch. Already,
social and political backlash against more austerity is becoming
overwhelming with strikes, riots, violence and rise of extremist
politics.
They just need growth. Another year of muddling through only revives old risks in a more virulent form in 2013 and beyond.
The United States:
Growth in United States remained anaemic at 1.5%2% for most of 2012.
Political and policy uncertainties abound. Fiscal worries are centred on
four key areas: taxes, spending, stimulus and borrowing.
The United States needs:
(i)
A package exceeding US$1 trillion in revenues over 10 years and set in
motion a tax reform process in 2013 to limit tax deductions and lower
rates for businesses and individuals;
(ii) A package of spending
cuts with less generous social benefits, health spending reductions and
cuts in selected mandatory programmes, including military;
(iii) Some short-term stimulus measures, especially on infrastructure projects and on education and R&D; and
(iv) Raising the debt ceiling now.
Already,
with continuing impasse even at this late hour, forecasters are
downgrading growth expectations for 2013. “It's a dangerous situation,”
says Nobel Laureate P. Krugman. “The opposition is lost and rudderless,
bitter & angry as it lashes out in the death throes of the
conservative dream.”
All this is happening at a time of significant game changes boosting the outlook:
(a) Housing is recovering;
(b) Manufacturing re-engineering is underway;
(c)
The third quarter 2012 growth is up 3.1% (1.3% in the seconbd quarter),
with consumer spending rising 1.6% and unemployment down to 7.7%, its
lowest since 2008;
(d) Pent-up demand is awaiting to be unleashed upon clarity on the future fiscal pathway; and
(e) New future in energy transformation, especially from low cost shale oil and gas.
But
first, the daunting task to regain business and consumer confidence
needs to begin now. Because of continuing uncertainty, consensus
forecast chances of 24% for greater than 3% growth in 2013, same as
chances of a recession.
On the whole, they expect growth of 2.3%
in 2013, better than three months ago. But, this won't materially help
the 12 million jobless. Even by 2014, unemployment is unlikely to be
lower than 7%.
East Asia and Pacific (EAP):
World Bank's
December update places growth in China and developing East Asia at 7.5%
in 2012 (against 8.3% in 2011) in the face of weak external demand.
Growth
in EAP is still the highest among the developing world and constituted
40% of global growth, but is set to recover to 7.9% in 2013.
EAP
(excluding China) will grow 5.6% in 2012, 1% higher than in 2011 due
mainly to a rebound of activity in Thailand, strong growth in the
Philippines, and relatively modest slowdown in Indonesia and Vietnam.
Malaysia held a steady course.
For the entire region, easy fiscal
and monetary policies supported growth. Next year, the region will
benefit from continued strong domestic demand and the mild expected
global recovery, especially in the second half of 2013.
I agree
with the World Bank that most EAP nations have retained strong
underlying macroeconomic fundamentals and should be better able to
withstand external shocks. But many risks remain, including open
vulnerabilities in the eurozone that could readily lead to renewed
financial market volatility, and global slowdown: The United States
falling off the “cliff” resulting in a loss of growth push for EAP;
potential hostility arising from political territorial tensions in the
Asian seas; and fallout from unexpected developments in Syria and the
Middle East.
However, the robust growth in services this year
reflects strong domestic support derived from continuing rising incomes.
As these trends gather strength, services can be expected to emerge as a
new growth driver in EAP.
For the region, latest business
sentiment surveys have turned positive for the fourth quarter of 2012,
reversing two consecutive quarters of declines, while global
uncertainties remained the biggest concern for the region's firms.
China
is expected to grow by 7%-9% in 2012 (9.3% in 2011), the lowest since
1999, due mainly to lower domestic demand growth reflecting the 2011
stabilisation measures. World Bank expects China to expand 8.4% in 2013
fuelled by fiscal stimulus and faster effective implementation of large
investment projects.
Indications are the recent slowdown has now
bottomed out: The third quarter 2012 GDP rose 7.4%, below the historical
trend and the lowest in 14 quarters, but its quarter-on-quarter growth
reached a 9.1% annual rate in the third quarter of 2012. Growth is,
however, expected to slacken to 8% in 2014 as productivity and labour
force growth tail off.
Consumer prices will likely continue to
fall, averaging 2.8% in 2012, but will rise moderately to 3.3% in 2013
as growth picks up and the lagged effects of easy monetary policies in
the second half of 2011 take hold.
China's policy challenge is to
balance the trade-off between supporting growth and reforming. But,
priority remains at implementing targeted tax cuts, health and social
welfare spending and large-scale social housing to support consumption.
What, then, are we to do?
Geopolitical
uncertainties will engulf 2013. Consumers, corporate and investors are
bound to remain cautious and risk adverse even scared.
But prospects in EAP look bright and the region continues to have ample fiscal space to counter the impact of external shocks.
Much
of the global uncertainties are still being generated in Europe. It's
messy there right now, but the recovery of Europe will come some day.
Today,
the ratio of stock market value to GDP averaged worldwide at 80%. In
peripheral Europe, this ratio ranged from 23% in Greece to 38% in
Portugal akin to where Asian counterparts were in 1998. Italy's total
stock market value is today about the same as
Apple's.
R. Sharma of
Morgan Stanley made these and other insightful comments in the
Financial Times, with this refrain: Is Italy worth no more than Apple? Food for thought.
Look at it this way. We all have to keep the perspective in approaching 2013 in order to avoid our own self-made “cliff.”
WHAT ARE WE TO DO
BY TAN SRI LIN SEE-YAN
●
Former
banker, Dr Lin is a Harvard educated economist and a British Chartered
Scientist who speaks, writes and consults on economic and financial
issues. Feedback is most welcome; email: starbiz@thestar.com.my.
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