Growth not likely to pick up in 2013
By Patrick Artus
International institutions and the consensus of forecasters expect an upswing in growth between 2012 and 2013. The International Monetary Fund, for example, expects global growth to come in at 3.5 percent in 2012 and 3.9 percent in 2013. Predicting an improvement in the economies in the future, even if the current situation is poor, is a common bias among forecasters. However, we now have to face reality: the global economy is going to weaken and not pick up again between 2012 and 2013.
Four key factors explain this negative development: the European crisis is worsening due to the erroneous strategy that is being conducted in Europe; the United States and Japan, whose economies have been quite vigorous in 2012, will conduct very restrictive fiscal policies in 2013; and the major emerging countries are struggling, not only due to the slowdown in global trade but also, which is more serious, because of persistent structural problems. Lastly, there are no more counter-cyclical policies available, as monetary policy is already very expansionary and since fiscal deficits have to be reduced.
The strategy applied in the eurozone and the United Kingdom consists in rapidly and simultaneously reducing fiscal deficits in all countries. The result is a sharp contraction in activity that is totally counterproductive, since it prevents any reduction in the fiscal deficits and leads to even more restrictive fiscal policies. If this strategy is not changed, all countries will record either zero growth, for example in France, the United Kingdom and the Netherlands, or sharply negative growth, for example in Spain, Italy and Greece, with a divergent dynamic where real activity declines more and more and public finances deteriorate more and more. In Europe, however, switching to a different strategy with a smoothing of the fiscal adjustment over a much longer time and the implementation of growth stimulus policies is out of the question.
In 2012, the U.S. and Japanese economies have been quite buoyant, with a growth rate of roughly 2.5 percent linked to growth both in consumption and investment, and with noticeable reindustrialisation in the United States. However, 2013 will be marked by very restrictive fiscal policies in both these countries: doubling of the VAT rate in Japan in 2013 and 2014; reduction in the U.S. fiscal deficit by 2 to 4 percentage points of GDP depending on the decisions taken after the presidential election, which will reduce growth by 1.5 to 3 percentage points.
The European recession has spread to all countries via global trade, which has posted zero growth in value terms in the past year. This is stifling the economies of emerging countries, especially those with very open economies: South Korea, Taiwan, Singapore, Central European countries other than Poland, etc. But the major emerging countries are also suffering from persistent structural problems. China is losing its competitiveness as a result of rapid wage increases but these increases are not boosting domestic demand due to the continuous rise in the savings rate; Brazil is going through a major industrial recession, with job losses and falling investment because of the huge overvaluation (around 30%) of its real exchange rate. India has suffered from industrial stagnation for two years due to full employment among the employees that are sufficiently skilled to fill a job in the industrial sector. So the emerging world is experiencing a pronounced and lasting slowdown in its growth.
Finally, all these negative developments cannot be offset by counter-cyclical policies in 2012-2013, since monetary policy is already highly expansionary, including in emerging countries with the exception of Brazil, fiscal deficits must be reduced in OECD countries, and an infrastructure-driven recovery in China is hampered by the financial problems of local authorities.