January 31, 2012 Patrick Oliver-Kelley

The world economy is sluggish, but not moribund. Pessimism is overdone. Latest statistics especially in manufacturing were better than expected. The world economy is sick. Politicians are doing little to help matters. Yes the world seems to have slipped into recession, but it is expected to be short and shallow. Uncertainty is still acute and there appears to be a pernicious cycle of weak growth, bigger deficits and more austerity is setting in.

China’s economy is clearly cooling. Commodity prices are weakening, creating a weaker export picture for Latin America. India faces a big budget deficit, declining confidence and high inflation. The Euro crisis will hit growth in Eastern Europe and in Turkey. Perhaps there will be surprisingly good news out of the US, if Americans could believe in themselves a bit more. Household debt has fallen, the housing market shows signs of life, though meager and unemployment made a modest down tick. Of course the US being in its election year cycle, makes for a darkened political environment with its attendant uncertainty.

2012 is shaping up to be the year of self-induced sluggishness. The pragmatic commitment to growth seen in Asia stands in stark contrast to the West’s misguided policies that seem driven by ideology and vested interests that almost guarantee no Growth.

Global Economic Prospects

US Economy

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The Fed is not expected to raise interest rate until late 2014. Nearly one third of Americans raised middle class have dropped down the economic ladder, before this Great Recession hit them. Things have only gotten worse. Pity is that recovery may take longer than traditionally. Employment is tacking higher, but not by much.

Unemployment stands at 8.5% the lowest since 2009 and is seen edging below 8% only by the end of 2013. The economy still faces a headwind of heavily indebted consumers, moribund home sales, and fiscal austerity at all levels of government. As we’ve said before, the US needs more entrepreneurs. The dismal housing market is keeping people in place people who could otherwise, move to where jobs are. New approaches need to be tried to slow down foreclosures and lighten household debt. The Fed should set a target for the growth of bank credit, especially after it lowered its projection for economic growth to between 2.2% and 2.7% in 2012 and 2.8-3.2% in 2013.

Energy independence through the growth of energy exploration of natural gas and shale oil production is being recommended by many. With unemployment too high and inflation still weak, more monetary stimulus is easily justified. It’s going to be a hard slog.

Eurozone

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The impression of growing stress across much of the Eurozone economy is inescapable. Trouble is Brewing, but can no one stop this brewing? The World Bank forecasts that the Eurozone economy will shrink 0.3%. Talk between Greece and its private sector are not going well. Though the EU has said that the Greek deal will not set a precedent, no one believes it. More likely, the deal will become a starting point for fellow travelers. Nonetheless, the Greek deal is crucial. Europe will figure out that austerity alone will not solve its problems. In fact austerity will only make things worse.

What is really needed is a plan for economic growth. Without Growth, the debt crisis, and the euro crisis will only worsen. The euro will continue to fray nerves. It is at a two year low against the US dollar. Fitch is expected to lower Italy’s sovereign debt rating and warned that Italy was in the front line of the Eurozone crisis. More hopefully, France and Germany seem to be turning their attention to growth. Make no mistake, Europe is increasingly a German-led and –managed continent. Today, everyone prefers an active Germany. We think that is the right move for both countries. Unemployment throughout the zone is over 10% with few glimmers of light.

From the policy perspective, the EU has only two choices: break up the euro as currently constituted, or try to force greater political and fiscal centralization. The latter seems filled with unsavory risks. George Soros was quoted saying that it is not too late for the euro and the EU. A two-part plan of first restructuring the single currency block to provide economic stimulus such as what we suggested several months ago – Create a single Eurobond that can be issued at 1%.

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Comment (1)

  1. Mike Kelley

    Patrick,
    You do not have to ring me back on my voice message. All questions were answered in your report.
    Why can’t the political process be so accurate and informative. We are at the same Cross Roads
    that we come too every political election. Every Presidential election. I simply ignore the papers during elections and watch CNN or any other news report. I really don’t care who is in office anymore. I just want to have a chance at making an honest living and feed my family. I am 58 years old with kids and 3 Grand Kids. I’m not lazy. I am willing to help those who have been through a lot. I too have been through more than I care to share with anyone. I still work. I still cook and clean my own house. I love America. God has blessed America. Our country is the best in the world. I appreciate those who have served and care about our Vets. God Bless our Vets and God Bless America! Sorry but it’s all I have to say and thank you for foreseeing the financial future as you see it. I hope our Government Officials take notice to your opinions!

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