Even Without Fiscal Cliff, World Economy Teeters

Sunday, 02 Dec 2012 03:33 PM

 

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The global economy is on edge - and that's without the U.S. "fiscal cliff."

Among rich nations, the U.S. outlook remains the least troublesome. But given a recession in the euro zone and a recent contraction in Japan, that's not saying a lot.

At the same time, many emerging markets are hurting. India is likely to log its weakest growth in a decade this year and Brazil's economy is also sputtering. Luckily, growth in China appears to be firming.

In the United States, the economy faces growing challenges even without the ongoing political wrangling over the $600 billion in government spending reductions and expiring tax cuts set to kick in at the start of next year.

The coming week brings a slew of reports expected to show the U.S. economy struggling. Data on Friday will likely show employment growth slowed to just 100,000 jobs last month from 171,000 in October, according to a Reuters poll of economists.

U.S. manufacturing data this week is also likely to suggest a fourth-quarter slowdown is at hand.

Indeed, some worry the fourth quarter, which has been affected by the impact of superstorm Sandy, will bring the world's largest economy remarkably close to stall speed.

"The risk of seeing a negative sign in front of fourth-quarter GDP is nontrivial, to say the least," said Tom Porcelli, economist at RBC Capital Markets. Following figures showing consumer spending fell in October for the first time in five months, Porcelli revised down his forecast for fourth-quarter U.S. GDP growth to a 0.2 percent annual pace from 1 percent.

 

EUROPEAN, GLOBAL MORASS

The United States' travails come against a troubling global backdrop.

Europe is still a mess. Greece's latest debt deal quelled immediate concerns of a financial market meltdown, with terms of the country's bond buy-back plan likely to be announced early this week. But the country remains mired in a deep depression, with little prospect for recovery, and not everyone is convinced it will be able to remain a part of the single currency.

"We expect the euro to come under pressure again soon, and continue to forecast that the exchange rate against the dollar will tumble to parity next year as Greece eventually leaves the euro zone," said John Higgins, economist at Capital Economics in London.

The attention of financial markets has also quickly returned to Spain, where the economy continues to worsen despite an improvement in credit market conditions prompted by hopes of eventual help from the European Central Bank. Spanish retail sales plunged 9.7 percent in October, pointing to a further sharp contraction for a country that has been in recession for more than a year.

The trouble for Spanish Prime Minister Mariano Rajoy is that ECB help, in the form of purchases of Spanish bonds, will not come unless Spain formally applies for sovereign aid, a highly unpalatable choice politically.

Still, it is one the government may eventually have to stomach, as evidenced by its willingness last week to break with a key campaign promise and forego inflation adjustments for retirees' pensions in order to meet its deficit targets.

Other global engines of growth also look to be softening.

Not only did growth slow in India and Brazil in the third quarter, but it braked in Canada as well. China now may be the exception, with a gauge of factory activity hitting a seven-month high in November.

 

CLIFFHANGER

Hovering over this rather dispiriting global scene, Washington's bickering appears to be nowhere near over, with both Democrats and Republicans holding firm to their positions.

U.S. House Speaker John Boehner, the top Republican in Congress, said on Friday that talks were at a stalemate. In an interview that aired on Sunday, he dismissed a proposal presented by the Obama administration last week as "nonsense."

The biggest sticking point is whether to extend low tax rates on household income above $250,000 established under former President George W. Bush. Boehner said Republicans still oppose raising tax rates on any income group.

Hopes for a deal now hinge on the growing number of Republicans in the House, including a handful of Tea Party-backed conservatives, who have begun signaling greater flexibility than their leaders in softening their opposition to higher taxes for the wealthy.

Obama is hoping to appeal to more potential renegades to get a deal to avoid the budget crunch that economists say would tip the economy back into recession.

© 2014 Thomson/Reuters. All rights reserved.

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