2. Preface
Global Economic He says that “plenty of things could go wrong” and that the UK is headed for a “shaky and tepid
recovery.”
Outlook In my article on Japan, I indicate that Japan’s economy remains on shaky ground. With severe
external headwinds, a highly valued currency, continued deflation, declining real wages, and stag-
nant consumer spending, Japan is not experiencing a significant recovery. Moreover, the central
Q4 2012
bank has chosen not to expand its policy of quantitative easing despite falling prices. Finally, a
political dispute with China appears to be having a negative impact on the industrial economy.
Thus, the outlook for Japan is not especially good.
Ira Kalish, Deloitte
In his article on India, Pralhad Burli discusses the fact that India’s economy is
operating below potential. He says that the outlook for a return to high growth Global Economic Outlook
Research in the
United States Will 2013 Be a Turning Point? published quarterly by
is not especially good. The country faces a number of downside risks, including
(Deloitte Services LP) Deloitte Research
uncomfortably high inflation, which has restrained the central bank; external
headwinds; and an uncertain policy environment. On the other hand, the govern- Editor-in-chief
ment has proposed several new reforms that, if enacted, would likely lead to better Ira Kalish
long-term growth. The problem is that severe political opposition remains. Thus,
I t has probably been said too many times, but it is worth repeating now. The world economy is at a uncertainty prevails. Managing editor
crossroads. Every major region seems to be at a potential turning point. In Europe, the leaders of Next, I discuss the outlook for Russia. Against the wind of much of the global Ryan Alvanos
the Eurozone are moving slowly toward more integration, while periodically fighting back against economy, Russia’s central bank is tightening monetary policy in order to restrain
Contributors
new crises. In the United States, slow growth continues, but various forces seem destined to push inflation. In the midst of a global slowdown, this is likely to lead to a slowdown in Pralhad Burli
the economy either toward recession or faster growth. In China, the economy has landed softly, growth. Indeed, there are signs that this is already happening. Alexander Börsch
but the next steps depend on the decisions of a new leadership. And in India, the government has Brazil, on the other hand, is moving in a different direction. In my article on Carl Steidtmann
attempted to kick-start the reform process just as the economy seems to have stalled. At the very Brazil’s economy, I note that the central bank has cut its benchmark interest rate Ian Stewart
least, the next year will be an interesting one. by over 500 basis points in the past year. It has clearly chosen to focus on growth
Editorial address
In this issue of the Global Economic Outlook, our economists from around the world offer their rather than inflation, which remains above the central bank’s target. The outlook,
350 South Grand Street
perspectives on these and other issues. First, Alexander Borsch discusses the Eurozone situation. therefore, is for stronger growth next year. The most notable short-term issue is Los Angeles, CA 90013
He notes that, while the crisis appears to have ebbed in the wake of new policies by the European the potential impact of US monetary policy on Brazil’s exchange rate. Tel: +1 213 688 4765
Central Bank, the underlying problems remain unresolved. He suggests that, other than collapse, Finally, Neha Jain and Satish Raghavendran offer a perspective on the econ- ikalish@deloitte.com
the Eurozone has four options to move forward. These range from modest efforts to enforce existing omy of South Korea. At a time when South Korea has achieved an enviable level
constraints to full-scale integration in the form of a political union. of affluence, it now faces short-term obstacles to growth. With export demand
Next, Carl Steidtmann looks at the US economy and notes that the situation is historically weakening, the domestic economy is at risk due to excessive consumer debt, accumulated to fund
unique. That is, never before has growth “been so anemic for so long.” He demonstrates that, histor- an increasingly consumer-driven economy. Longer term, Neha and Satish point out that South
ically, such slow growth usually leads to a recession, or sometimes to accelerated growth, but never Korea needs to shift the focus of its economy away from manufacturing in favor of services.
to simply more of the same. Thus, we appear to be in new territory. He suggests that the economy
has been the beneficiary of “luck and resilience” that are likely to be severely tested in 2013. This
will be due to a range of factors, including fiscal policy, headwinds from Europe, and risky mon-
etary policy. Consequently, he sees a high risk of recession.
In my examination of China’s economy, I point to evidence that a soft landing is underway.
Moreover, I suggest that the current policy regime is likely to modestly boost economic output Dr. Ira Kalish
in the coming months. Yet many questions remain, not the least of which concern the policy Director of Global Economics
Deloitte Research
choices to be made by the incoming leadership. As such, there is some degree of uncertainty about
China’s outlook.
In his article on the British economy, Ian Stewart says that the UK may be turning the corner
but not perhaps in the way that many would like. He says that although growth should resume in
2013, the situation warrants concern, given all the remaining problems—both external and internal.
2 3
3. Contents
6 Geographies India: Cautious Optimism | 30
30
Uncomfortably high inflation, external headwinds, and an uncertain
Eurozone: Four Models for Future Governance 6 policy environment are adding downside risk to India’s economy,
which is operating below its potential. The government has proposed
The Eurozone’s crisis appears to have ebbed after the European Central
several reforms that could improve long-term growth, but political
Bank’s recent policy responses. However, many of the region’s underly-
opposition is adding a dose of uncertainty to India’s economic outlook.
ing problems remain unresolved. Discounting a complete collapse, the
Eurozone has four fundamental governance models to choose from.
Russia: Slowing Down | 36
12 United States: Uncharted Waters | 12 Despite a global economic slowdown, Russia’s central bank decided
to tighten monetary policy in an attempt to curtail inflation. This may
36
The US economy has benefitted from a combination of luck and resil-
lead to a slowdown in growth.
ience, and ongoing anemic growth in the United States is historically
unprecedented. A wide range of factors, including fiscal policy, head-
winds from Europe, and risky monetary policy may loom over the US Brazil: Chasing Growth | 38
economic outlook into 2013. Brazil’s central bank decided to focus on growth rather than inflation,
which will likely result in stronger growth next year. The US monetary
China: When Exports Decline | 20 policy could have a significant impact on Brazil’s exchange rate.
20 The current policy regime may continue to boost economic output in the
coming months, paving the way for a soft landing. Uncertainty pertain- Korea: S(e)oul Searching | 42
38
ing to China’s economic outlook stems from the policy choices that will South Korea has achieved an enviable level of affluence, but weaken-
be made by the country’s incoming leadership. ing export demand and excessive consumer debt may put the brakes
on economic growth. In the longer term, South Korea may need to
United Kingdom: Turning the Corner, Slowly | 22 consider a move away from manufacturing in favor of developing a
service-based economy.
The United Kingdom’s current downturn is likely coming to an end, but
myriad internal and external problems remain, which could result in a
shaky and tepid recovery.
22 Appendix
42
Japan: An Elusive Recovery | 26
External headwinds, a highly valued currency, continued deflation,
stagnant consumer spending, and declining real wages are hindering
Charts and Tables | 46
Japan’s economic recovery. Furthermore, despite falling prices, the gov- GDP growth rates, inflation rates, major currencies vs. the US dollar,
ernment has decided against expanding its policy of quantitative easing, yield curves, composite median GDP forecasts, composite median cur-
and a political dispute with China is having a negative impact on Japan’s rency forecasts, OECD composite leading indicators
industrial economy.
26
4 5
4. Eurozone Geographies
EUROZONE
Dr. Alexander Börsch
is Head of Research,
Deloitte Germany
Eurozone: Four Models
for Future Governance
by Dr. Alexander BÖrsch
T he euro crisis is now officially in its fourth
year. It started in October 2009 when the
Greek government admitted that its budget
a renewal of the Eurozone’s original guid-
ing principles with a focus on member state
responsibility to a political union with nation-
of the German constitutional court that the
euro rescue strategy is in principle consistent
with the German constitution, given certain
fact that there is no clear vision about where
the Eurozone is heading in terms of gover-
nance structures and architecture. The euro
deficit was much higher than it previously state-like features. limitations, removed doubts about the future crisis includes a debt crisis, a banking crisis,
stated. In the years that followed, the crisis not In early October, the euro looks as if it is of the rescue mechanism. The Dutch elections a growth crisis, and a competitiveness crisis.
only deepened in Greece and spread to other on a slow road to recovery, at least measured resulted in a stable pro-euro coalition. Taken That is why it is unrealistic to hope for grand
countries, it also exposed serious flaws in the against recent expectations. Many experts con- together, and contrary to more apocalyptic bargains and comprehensive solutions to cut
governance of the euro and the Eurozone. sidered September to be the decisive month for predictions made during the summer months, the Gordian knot. However, a clear vision for
There are basically four options to reform the fate of the euro, and expectations tended to early autumn has been a comparatively quiet the future of the Eurozone’s governance struc-
the Eurozone’s governance. The two main be pessimistic. From that perspective, things time for the Eurozone. tures is a precondition for political action and
dimensions that will determine the future developed fairly well. The decision of the However, this situation is not a reliable for kicking the can in the right direction.
shape of the Eurozone are the possible com- European Central Bank to renew its bond pur- predictor of future events. Part of the dif-
binations of extended political integration chase program has reassured the financial mar- ficulty in solving the euro crisis is due to the
and fiscal transfers. The options range from kets and bought important time. The decision
6 7
5. Global Economic Outlook: 4th Quarter 2012 Eurozone Geographies
Is there a light at the end deteriorating. The ifo Business Climate Index
Figure 2: Current account
[% of GDP]
of the recession tunnel? continued to fall in October, the sixth consecu- 10
tive monthly decline.
At first glance, no. The latest data on the Nevertheless, there are some cautious signs France
5
economic sentiment in the Eurozone reinforce that reforms in the crisis countries are begin- Germany
the trend of the last months. The European ning to gain traction and yield positive results. 0 Greece
Economic Sentiment Indicator, which mea- Among these are the reduction in the current Ireland
sures the outlook on the part of business, account deficit and the improvement in price -5
Italy
consumers, industry, and services, continues competitiveness. Unit labor costs in Greece,
-10 Spain
to decline for the Eurozone as a whole as well Spain, and Ireland have fallen quite substan-
as for the crisis countries, with the exception tially and are forecasted to continue to do so Eurozone
-15 (17 countries)
of Spain. Also, the outlook for Germany is (see figure 1).
-20
Figure 1: Unit labor costs 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
[2000 = 100] Source: OECD
140 Germany
Eurozone
resort to devaluations. Second, rules to prevent future crisis and support the way out of the
130 Greece
excessive budget deficits in the form of the current crisis.
Spain
Maastricht criteria are enough to guarantee the Conceptually, there are two main dimen-
120 France stability of the euro. Third, specific provisions sions of Eurozone reform. The first is politi-
Italy for crisis management are not needed. Crises cal integration. The question is whether the
110 Ireland will not happen if members stick to their obli- Eurozone needs deeper political integration
gations and follow the Maastricht rules. and a transfer of decision making to the
100 The euro crisis has made it blatantly obvi- European level or whether the primacy of
ous that these assumptions do not hold any the member states needs to be preserved and
longer. Crisis management has become the strengthened. The second dimension concerns
90
almost-exclusive focus of European political fiscal transfers between member states. Fiscal
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Eurostat
leaders. The rules of the Maastricht treaty have transfers can, in principle, be used for emer-
prevented neither excessive budget deficits nor gency measures or in an institutionalized form.
the resulting threats to the euro. The euro did
not initiate a broad dynamic toward reforms Options for the Eurozone
Equally remarkable is the development of other main pillar is the governance of the and higher competitiveness. The burning ques- Combining these two dimensions in
the current account deficits of the crisis coun- euro itself. tion, therefore, is how to redesign and amend a matrix illustrates the main options for
tries. Greece managed to reduce its current the euro’s governance structure to prevent European policy makers.
account deficit from an extremely high level. Governing the Eurozone
Spain achieved the same, and Ireland managed
Fiscal transfers between member states
to turn its deficit into a surplus (see figure 2). The institutional architecture of the
In other words, fundamentals are beginning Eurozone was built on three main assumptions. Low High
to improve. While this is not yet reflected in First, mechanisms compensating for the loss
Degree of further
business expectations, the conditions for an of the exchange rate as an adjustment tool are political integration
Low Maastricht 2.0 Emergency union
improvement are being built. not needed. Countries will adjust to the new
High Coordinated association Political union
While reforms in the crisis countries are currency regime by internal reforms and will
crucial for a recovery in the Eurozone, the modernize their economies once they cannot
8 9
6. Global Economic Outlook: 4th Quarter 2012 Eurozone Geographies
Maastricht 2.0 While it is obvious that the European sanction mechanisms; the method works similar intention, and so has the European
The original Maastricht treaty from 1992 Union cannot become a nation-state overnight, mainly through peer pressure. Stability Mechanism, the main instrument to
includes three main elements: it could assume the functions of a nation-state A greater coordination of the economic guarantee the liquidity of governments that
in key areas to guarantee the survival of the policies of member states would require lose access to financial markets.
• Member states must not run a budget defi- euro. These key functions would include a enlarging the scope and the depth of coor- Whether this approach can work and bring
cit of more than 3 percent of GDP. banking union, common deposit insurance, dination, as well as pal- the euro into shallow
at least some mutualization of debt, and larger pable sanctions. Areas that waters depends on
• They must have a debt level of no more redistribution through fiscal transfers between offer themselves to greater whether the crisis is
than 60 percent of GDP. the Eurozone’s member states. coordination in order to due to a temporary
These moves would imply a centralization support a smooth function- exceptional situation
• Eurozone members should not be liable for, of fiscal policies and therefore a much stronger ing of the euro include wage or to deeper insti-
nor assume, the commitments or debts of role of the EU in fiscal policy, if not a European policy, pension policy, and tutional flaws in the
any other member state. finance ministry with corresponding compe- fiscal policy. For example, governance of the
In this original Maastricht framework, tencies. As this would touch upon the core a coordinated association Eurozone. If the lat-
it is the member states that are exclusively functions of national parliaments, a political could aim at preventing the ter is true, the case-
accountable and responsible for healthy union might need to follow to ensure demo- emergence of large imbal- by-case approach is
public finances. As long as the rules work, the cratic control. In other words, in economic and ances in the Eurozone by unlikely to work, and
stability of the euro is not threatened as over- financial matters, the EU would become the mutually adjusting national bridge financing is
indebtedness and resulting instability cannot main actor and decision maker. While there economic policies. not enough to let the
be an issue. are many proposals and plans on how and in storm pass.
However, the rules obviously failed, and which areas European integration should move Emergency union
the main elements of the original Maastricht forward, concrete steps have not been taken, Outlook
provisions, such as the debt ceilings, are under and workable plans have not been developed. The model of an emer-
pressure. Others, such as the no-bailout clause, gency union comes quite The most con-
have been totally pushed aside. The option of a Coordinated association close to the current working sistent options of
Maastricht 2.0 scenario would need to include of the Eurozone in the face the four are the
strengthening the original provisions, ensuring Currently, the European Union is a com- of the crisis. It is a series of Maastricht 2.0 sce-
compliance, and providing a framework that plex combination of national, supranational, rather unsystematic emer- nario and the political
puts national responsibility for public finances and intergovernmental decision making. gency measures that try to union as they define
first. This implies that future crises of the euro While the big political decisions regarding prevent the worst on a case- clear responsibilities
are to be prevented by an improved version the Eurozone are taken in the Council of by-case basis. The worst, of for decision making,
of the original framework. Some of the recent the European Union by the national govern- course, is a fragmentation of either on the level of
reforms in the EU—above all, the debt brake— ment leaders, the day-to-day business in the the Eurozone. This process the nation-state or on
go arguably in the direction of Maastricht 2.0. EU’s areas of competence is carried out by does not have a well-for- the European level.
the European Commission. National eco- mulated goal, but is highly Both are ambitious.
Political union nomic policies remain firmly in the hands of event-driven. The Maastricht 2.0
national governments. While it is true that the would need to address
A future political union is being widely To be sure, there have been some attempts European Union has been and overcome obvious
discussed. It builds on the idea that the funda- to achieve a higher coordination of national built in times of crisis and that a step-by- weaknesses in the old institutional architec-
mental reason for the euro crisis is the fact that economic policies. The last decade saw the step process is not a bad thing in itself, the ture. The formation of a political union would
there is no nation-state standing behind the introduction of the “open method of coordina- question is whether the measures add up to imply a transfer of authority unseen in the his-
euro that defends it unconditionally. So, saving tion.” This method aims at directing national something that prevents future crises. So far, tory of the nation-state with many foreseeable
the euro may require the establishment of a policies toward common and agreed goals. It the bailouts—especially in the case of Greece— and unforeseeable challenges. The main issue,
European nation-state—or at least something rests on instruments such as evaluation and bought time, tried to keep states liquid, and however, is what the preferred option for the
that resembles a nation-state. benchmarking of policies. There are no hard forced them to introduce reforms. The ECB’s future of the Eurozone actually is.
announced bond purchase program has a
10 11
7. United States Geographies
USA
Dr. Carl Steidtmann is
Chief Economist at
Deloitte Research
United States: Uncharted Waters
by Dr. Carl Steidtmann
F rom the performance of the US economy
to the unprecedented policy mix being
employed to address the current malaise, the
growth has neither accelerated nor fallen
into recession.
What is also unprecedented about the
United States is in uncharted economic waters. weakness of the current recovery is that it is
The US economy’s performance over the past following a deep recession. Historically, deep
18 months has been unprecedented. There recessions create pent-up demand. During
has never been a time when growth has been a recession, businesses put off investments,
so anemic for so long. There have been 14 and inventories are drawn down. Consumers
instances since the end of the Second World put off purchases of cars and homes. Young
War when real economic growth fell to less people stay at home with their parents, put-
than 2 percent. In 11 of those cases, a reces- ting off marriages and delaying the process of
sion followed within two quarters of hitting household formation to save money. When a
the 2 percent stall level. In three cases, expan- recovery comes, much of this pent-up demand
sion reaccelerated. This is the first case where gets released, producing a strong recovery. In
12 13
8. Global Economic Outlook: 4th Quarter 2012 United States Geographies
the three years following the end of the Great The performance of the labor force has also However, the mix of the decline in overall Figure 3:
Real per capita disposable income
Depression in 1933, real GDP rose a sizzling been uncharacteristic. Throughout the past labor force participation does not fit the nar- Five-year growth
38.9 percent. That has not been the case this 50 years, labor force participation has risen rative of retiring baby boomers. Over the past Percentage change over the past five years
time; growth is up a modest 5.8 percent in the as women and baby boomers moved into the five years, even as participation rates for other 25
two and a half years since the end of the reces- work force. With the baby boomers approach- age cohorts have fallen, boomers have lingered
sion, which is the slowest pace of growth for ing their retirement years, one would expect in the labor force. Since the beginning of the 20
any recovery since 1948 (see figure 1). labor force participation to begin to fall. last recession in December 2007, labor force
participation among the 55–64-year-old cohort 15
has actually risen slightly from 69.2 to 69.6 (see
figure 2). 10
Figure 1: Real GDP change—recession and recovery
% change Over the same period of time, participa-
5
25
Recession 10 quarters of recovery
tion among 16–24-year-olds has plummeted
from 61 to 55.6. Of the 4.3 million jobs created 0
20 since 2010, nearly 3 million of them went to
workers over the age of 55. The inability of -5
15 young people to gain a footing in the labor 1964 1970 1976 1982 1988 1994 2000 2006 2012
market will stunt their career development Source: US Bureau of Economic Analysis
10 and earning power for years to come. It will
also make it more difficult for them to service Household net worth
In trillions of dollars
5 their student loans. The default rate for the first
three years on student loans has jumped $120 80.0
0 billion or roughly 13.4 percent of all outstand- 70.0
ing student debt.
60.0
-5
1948 1953 1957 1960 1969 1973 1981 1990 2001 2007 A falling standard of living 50.0
Source: Bureau of Economic Analysis 40.0
Weakness in the labor market has translated
30.0
into an unprecedented decline in the standard
Figure 2: Labor force participation
Percentage of the cohort population
of living (see figure 3). Real per capita income 20.0
has dropped over a five-year period for the first 10.0
75.0 time in the post-World War II era not once but
twice in the past five years. Slow job growth 0.0
1964 1970 1976 1982 1988 1994 2000 2006 2012
70.0 coupled with declining labor market partici-
Source: Federal Reserve Board of Governors
pation has made for a toxic combination for
income growth. In addition, record low inter-
65.0
est rates have cut deeply into interest income,
60.0
Over 16
55 to 64
55.0
16 to 24
50.0
1997 2000 2003 2006 2009 2012
Source: US Department of Labor
14 15
9. Global Economic Outlook: 4th Quarter 2012 United States Geographies
sending it down from $1.4 trillion in May 2008 The Fed’s response the previous efforts at QE, this one has no end give a boost to exporters, it will result in higher
to $986 billion in August 2012. Faced with a weak labor market and a date and no set amount. The Fed will buy $40 import prices, particularly for energy.
In addition to the decline in per capita declining standard of living, the Federal billion in Treasuries and mortgage-backed The case for quantitative easing is that by
income, the household sector has also experi- Reserve’s response to the current business con- securities every month until unemployment suppressing interest rates, the Federal Reserve
enced an unprecedented decline in net worth. ditions has also been unprecedented. Founded falls below a level that is deemed acceptable by will force investors to take more risk in both
After peaking at $67.3 trillion in the third in 1913, it took the Federal Reserve 95 years to the Fed. Most Fed watchers expect QE3 to go the bond market and the stock market. The
quarter of 2007, household net worth fell to grow its balance sheet to just under $1 tril- on through 2013 at the very least, resulting in reduction in interest rates and the increase in
lion. In the fall of 2008, in a $600 billion expansion of the Fed’s balance investor risk taking will give a boost to asset
Figure 4: Federal Reserve’s balance sheet response to the collapse of sheet at the very least. prices in the housing market, the stock market,
Trillions of assets
Lehman Brothers, the Fed Quantitative easing is not a risk-free policy. and the bond market. The corresponding rise
pursued its first round of Printing money for the purpose of buying in wealth from these three developments will
3.50
quantitative easing (QE), government debt risks higher inflation and a bring about a recovery in the housing market
purchasing a wide variety weaker dollar. While a weaker dollar would and induce consumers to spend more and
3.00 of financial assets in the businesses to invest more.
process of doubling its
balance sheet to just over
2.50 $2 trillion (see figure
4). The purpose of the
first round of QE was to
2.00
provide liquidity to the
banking system that was
1.50 reeling from the shock of
the Lehman bankruptcy.
In the fall of 2012, the
1.00 Fed initiated a second
round of quantitative
easing, adding another $1
0.50
trillion to its balance sheet
through the purchase of
0.00 mortgage backed secu-
2007 2008 2009 2010 2011 2012 rities and US Treasury
bonds. While the bank-
ing system no longer
Source: Federal Reserve Board
needed liquidity, the
Fed’s objective was to lift
$51.2 trillion in the first quarter of 2009, a asset prices in an attempt to encourage invest-
stunning $16.1 trillion destruction of wealth. ment from banks and businesses and spending
Since then, wealth has climbed due entirely to from consumers.
the rise in the value of financial assets. Even Two years later, with unemployment still
with the rebound, net worth is still down $4.7 above 8 percent and the economy still growing
trillion from its peak, and it actually fell by at a subpar rate of growth, the Fed has initiated
$300 million in the second quarter of this year. a third round of quantitative easing. Unlike
16 17
10. Global Economic Outlook: 4th Quarter 2012 United States Geographies
Figure 5: The fiscal cliff components
The downside argument against more quan- Taken together, the tax increases and In billions of dollars
titative easing is that it results in a mispricing spending cuts that make up this year’s fiscal
of risk. It reduces the income of retirees who cliff come to roughly $600 billion. While there
depend on low-risk, interest-bearing assets. is no guarantee, there does seem to be some $250 $221
It also gives a boost to the price of food and agreement on at least some of the elements
energy, reducing the purchasing power of of the fiscal cliff. Both sides are on record as $200
all consumers. favoring a phase out of the payroll tax cuts. The
2 percent payroll tax holiday that went into $150
The fiscal cliff effect in 2010 represents roughly $95 billion in $105
$95
additional taxes. The automatic minimum tax $100
The debate in gets bigger every $65 $65
“
the United States year. The fix for $50
$18 $26
over fiscal policy the automatic $11
revolves around If the fiscal cliff isn’t minimum tax $0
the pending plus the “Doc fix” s s s s n s fix ts
ut ut fit
fiscal cliff (see addressed, as I’ve said, I for Medicare are
sh
tax
c
ll t
ax
c
he
rt
a xe
ca
r et
axe
ue
str
atio
sb
en
e
Do
c
d ing
cu
figure 5). What also likely to gain ro Ot q
ble
s en
Bu ay ble Se p
is remark- don’t think our tools are bipartisan sup-
P
Af
fo
rda Jo
Ot
he
rs
able about this port as they have
debate is how strong enough to offset in the past.
Source: Congressional Budget Office
unremarkable The big stick-
it really is. Over the effects of a major fiscal ing point will be
the past decade, extending the
more and more shock, so we’d have to Bush tax cuts significant increase in the fiscal contraction off into uncharted waters. Current monetary
of the tax code for high-earning and a sharp recession in early 2013. policy risks higher inflation and lower incomes
has become a think about what to do in households. This for retirees and lower spending power for
”
part of a year- was the point of Conclusions and observations everyone else. The fiscal cliff impasse all but
end dance that contingency.” contention back guarantees a more restrictive fiscal policy and
between political in August 2011 The US economy has shown a combination potentially another credit downgrade. Sluggish
parties, making —— Ben S. Bernanke, Federal Reserve chairman that led to the of luck and resilience in avoiding a recession employment growth, declining labor force
longer-term tax downgrade of while growing well below its potential for the participation, and shrinking real incomes are
and investment US debt by the past 18 months. That resilience and luck are a dangerous combination that could push the
planning for businesses and individuals more credit rating agencies. A second impasse over going to be tested in 2013 as the economy sails economy into recession in 2013.
challenging. In most years, indexing of the this issue could result in another downgrade.
automatic minimum tax and various invest- While the outcome of the fiscal cliff debate
ment and R&D tax credits were among these remains uncertain, at the very least, it seems
items. Medicare’s “Doc fix” also seemed to certain that the United States will face much
require a yearly vote. tighter fiscal policy in 2013 than it has in
Three factors make this year’s fiscal cliff recent years. With an economy growing near 2
debate different: one is size, the second is tim- percent, tighter fiscal policy will slow growth
ing, and the final issue is the reaction of the in the short term. A failure to resolve any of
bond rating agencies. the issues of the fiscal cliff could result in a
18 19
11. China Geographies
CHINA
China: When Exports Decline
by Dr. Ira Kalish
C hina’s economy is slowing down, but a
soft landing is still a possibility, thanks to
various measures undertaken by the govern-
Industrial production was up a relatively mod-
est 8.9 percent in August. Automobile sales
were up 8.3 percent in August, far slower than
ment that are helping to offset economic the pace of the last few years. All of this news
headwinds from Europe. Just the same, the suggests that China’s economy is weaker than to hold the currency steady. Evidently, China’s actions. The central bank cut the benchmark
country is experiencing an abundance of bad expected, and the anticipated rebound is not authorities are averse to allowing currency interest rate and reduced banks’ required
news. In September, for example, HSBC and yet here. It also boosts expectations that the depreciation as it would likely draw criti- reserves, thereby boosting bank lending. In
Markit published a purchasing manager’s index Chinese authorities will engage in further mea- cism from foreign governments. Given this addition, the government has increased public
that suggests that Chinese manufacturing was sures to stimulate the economy. political climate, China’s central bank has been investment in infrastructure.
in negative territory for the 11th consecutive Meanwhile, weakness in the industrial sec- intervening to keep the currency steady by The result of these measures has been
month. The PMI was 47.9 in September com- tor is having a negative impact on investment trying to mitigate rising inflation and declin- positive. China’s government announced that
pared to 47.6 in August; a reading below 50.0 into China. In August, China experienced ing currency that could kindle political unrest. new local currency lending increased by $111
indicates a decline in activity. The weakness a net outflow of capital for the third time in Yet at the same time, it is assuring that money billion in August, the biggest August increase
was largely related to poor export performance. 2012. This means that investors are moving supply growth continues at a moderate and on record. This is very likely due to the recent
The sub-index for export orders reached its money out of China, perhaps as a result of the rising pace. cuts in interest rates and the reduction in
lowest level in 42 months, and the sub-index declining profitability of Chinese companies One effect of the weakening industrial banks’ required reserves. Indeed, the broad
for employment was also in negative territory. and pessimism about the Chinese economy. sector is a decline in Chinese company profit- money supply increased 13.5 percent in August
Exports are the primary culprit. China’s To facilitate the outflow and prevent a drop in ability. The profits of China’s industrial com- from a year ago. Increased lending is welcome,
government reported that total exports were the value of the currency, the central bank sold panies fell in August for the fifth consecutive given that several indicators have lately been
up a very modest 2.7 percent in August from foreign currency. The central bank is boosting month. Profits were down 6.2 percent from a disappointing. The question now is whether
a year earlier. Exports to the EU were down domestic credit in order to offset the negative year ago, the fastest rate of decline this year. the government will choose to take further
12.7 percent from a year earlier, and Chinese impact on the money supply of sales of foreign Corporate revenue continues to increase, but actions aimed at stimulating the economy.
imports fell 2.6 percent in August to their currency. When a country experiences a net export-oriented companies are struggling to With a change of leadership about to take place
weakest performance since 2009. This was outflow of capital, it either leads to a decline maintain sales by cutting prices, resulting in in Beijing, major decisions may be put on
partly due to declining commodity prices, but in the value of the currency or a decline in the weaker profitability. hold until the new leaders have time to assess
it also reflected weakening demand in China. money supply if the central bank intervenes To deal with the slowdown in economic the situation.
activity, the government has taken a variety of
20 21
12. United Kingdom Geographies
UK
Ian Stewart is Chief
Economist at Deloitte
Research in the United
Kingdom
United Kingdom: Turning
the Corner, Slowly
by Ian Stewart
T he last five years have seen the worst
growth performance by the UK economy
since the 1920s. The UK economy saw a deep
was the hallmark of most postwar boom bust
cycles. The United Kingdom has also escaped
Great Depression levels of unemployment.
recession in 2008–2009 and entered a milder Indeed, employment has risen for the last
second recession in the last quarter of 2011. three years as job growth in the private sector
The current cycle’s GDP levels are comparable has outstripped public-sector job losses. Ben
to those of the 1920s. However, this compari- Broadbent, a member of the Bank of England’s
son overstates the degree of stress facing busi- Monetary Policy Committee, recently observed
nesses and households today. that, had the normal, pre-recession relation-
Low interest rates and forbearance on the ships held, the number of jobs in the United
part of lenders have helped soften the damage Kingdom would have fallen by 8 percent over
to the economy in recent years. UK interest the last five years. Instead employment has
rates and government bond yields today are stayed roughly unchanged. The result is that
at the lowest level since the foundation of the the UK unemployment rate today is well below
Bank of England in 1694. Debtors have not the peaks seen in the previous, milder UK
faced an acute interest-rate squeeze, which recessions of the ’80s and ’90s.
22 23
13. Global Economic Outlook: 4th Quarter 2012 United Kingdom Geographies
Relatively low unemployment has helped inflation has almost halved in the last year to on a UK recovery, which is widely expected shape today, and the larger corporates who
support consumers during a period of acute 2.5 percent—should lend additional support to to be powered by demand for British exports responded to the CFO survey are not espe-
difficulties. Other factors are also becoming consumer spending power. from abroad. cially constrained by cash or capital shortages.
more positive for consumers. Most of the big The outlook for a battered consumer sector While the UK consumer outlook has The big problems seem to be the weakness
tax rises are past. Sharply lower inflation—CPI is starting to look up. Real disposable incomes brightened marginally and corporates are of Europe’s economies and a climate of mac-
have risen 1.7 percent over the last year, having continuing to roeconomic
declined through 2011. And consumer spend- hire, businesses uncertainty.
ing is rising once again. Given that consumer
spending accounts for over 60 percent of the
remain cautious.
The third-quarter
The universal assumption After successive
waves of bad
UK economy, an upturn in consumer activ-
ity should lend significant support to growth
Deloitte Survey
of UK Chief
among economists—at least macro news fol-
lowed by policy
next year.
The universal assumption among econo-
Financial Officers
suggests that big
for now—is that the worst has stimulus and
equity rallies,
mists—at least for now—is that the worst has
passed for the UK economy. All 37 indepen-
corporates increas-
ingly subscribe
passed for the UK economy. UK corporate
CFOs may need
dent forecasting groups that provide GDP to the notion that some convincing
forecasts to the Treasury expect UK growth we are in a low- to turn signifi-
to bounce back in 2013. Most believe that the growth world. Perceptions of macro-uncer- cantly more positive on expansion.
current slowdown in the United Kingdom is tainty and of the risk of continued recession The United Kingdom’s current downturn
drawing to an end, and that steady growth will are widespread. Corporates are increasingly seems to be drawing to an end. Growth should
resume in the first quarter of next year. focusing on defensive balance-sheet strategies, pick up next year. But, as the continued dif-
ut a better test is what kind of growth including cash generation, cost control, and ficulties in the euro area highlight, plenty of
is expected next year. The news here is not leverage reduction. things could go wrong. For now, the United
encouraging. Consensus forecasts for UK GDP In 2008, a combination of a shock to Kingdom seems to be heading for a shaky and
growth for 2013 have dropped from 1.8 per- demand and a credit crunch caused a deep tepid recovery.
cent to 1.3 percent in the last four months—a recession. The financial system is in far better
pretty weak rate of growth for an economy
used to growing at 2.5 percent a year. Our
guess is that most economists would say that
the risks to their UK growth forecasts lie on
the downside.
Many of the problems facing the United
Kingdom exist elsewhere in the world. After a
lull over the summer, worries about the euro
area are growing. Hopes that a bond-buying
program by the European Central Bank would
crack the euro’s problems have dissipated.
Meanwhile, the United States may be on course
for sharp tax hikes and cuts in public spending
in three months’ time. Unless politicians strike
a postelection deal, the so-called fiscal cliff
could derail America’s recovery. Such exter-
nal uncertainties constitute a significant drag
24 25
14. Japan Geographies
JAPAN
Japan: An Elusive Recovery
by Dr. Ira Kalish
J apan’s economy has been mostly sluggish
for some time, despite the increased govern-
ment spending on reconstruction following
The government also reported that the
compensation of workers continues to decline,
with total wages to workers in Japan in the
last year’s earthquake and tsunami. Although second quarter only marginally higher than in
there have been periodic bursts of economic 1991—21 years ago. This means, of course, that
activity, such as the 5.5 percent growth rate in unit labor costs are declining, thereby improv-
the first quarter of this year, growth has mostly ing the competitiveness of Japanese products.
been disappointing. For example, the Japanese Yet that improvement is largely offset by the
government reported that the economy grew negative impact of a highly valued Japanese
at an annual rate of only 0.7 percent in the yen. On the other hand, declining wages
second quarter. This was revised down from contribute to declining purchasing power
the original growth estimate of 1.4 percent and stagnant consumer spending. This wage
in the second quarter. The slow growth was decline also contributes to deflation, which
largely due to weak private investment as well remains a serious problem in Japan.
as weaker-than-expected public spending This begs the question of whether the
on reconstruction. central bank will act according to its goals. The
Bank of Japan has set a formal inflation target
26 27
15. Global Economic Outlook: 4th Quarter 2012 Japan Geographies
of 1.0 percent, yet prices continue to decline the Bank of Japan chose to leave its asset This unexpected increase could bode well for brand vehicles in China dropped sharply.
despite a more aggressive monetary policy. For purchasing program unchanged at 55 tril- capital spending in the months ahead. While the vehicles are mostly assembled in
the past year, the Bank of Japan has engaged in lion yen (US$700 billion). In addition, the Just at a time when the Japanese economy China, many of their parts are made in Japan.
quantitative easing: the bank purchases assets Bank of Japan downgraded its assessment of hardly needs bad news, the political dispute Consequently, if this dispute results in a sus-
such as government bonds in order to inject the outlook for growth and inflation, saying, between Japan and China over a group of tained decline in Chinese demand for Japanese
liquidity into the economy. The idea is to boost “Economic activity is leveling off.” Unusually, islands is starting to have a real impact on the products, it could have real consequences for
the money supply, thereby creating some infla- the economy minister attended the latest meet- economy. Japan’s major automotive companies Japan’s already troubled industrial sector.
tion. Other goals include keeping market inter- ing of the bank’s policymaking committee. He report that, in September, sales of Japanese
est rates low and putting downward pressure said that he wanted to express his “sense of
on the value of the yen. Yet the policy, which crisis” to the bank. Clearly he failed to move
involved purchases of 45 trillion yen worth of the bank toward a more aggressive stance. Still,
assets (roughly US$570 some observers now believe
billion), has yet to that the bank will boost the
result in any inflation. Japan’s major quantitative-easing policy at
Perhaps that is because its next meeting, especially if
it is not very aggres- automotive it continues to downgrade its
sive compared to what assessment of inflation.
has been done by the companies Meanwhile, some indica-
US Federal Reserve or tors suggest that the health
the Bank of England. report that, in of the Japanese economy is
Consequently, on not improving. The well-
September 18, 2012, September, sales known Tankan survey,
the Bank of Japan which measures confidence
boosted its program of of Japanese brand among manufacturers,
quantitative easing by declined in September. This
10 trillion yen, demon- vehicles in China was the fourth consecu-
strating that the bank tive decline in this quar-
is concerned about dropped sharply. terly measure. In addition,
continued deflation exports fell in August for the
and a high-valued yen. third consecutive month,
It also means that the bank recognizes that the declining by 5.8 percent year over year, and
Federal Reserve’s new third round of quanti- imports fell 5.4 percent due to a recent slide
tative easing is likely to put downward pres- in oil prices, marking the sharpest decline in
sure on the US dollar and, therefore, upward nearly three years. Industrial production fell
pressure on the yen. Yet again, the question of in July, and purchasing managers’ indices for
whether this will be sufficient must be asked. both manufacturing and services were down
By October, with Japanese government in August. On the other hand, new orders for
officials urging a more accommodative policy, machinery rose 4.6 percent from June to July.
28 29
16. India Geographies
INDIA
Pralhad Burli is Senior
Analyst at Deloitte
Research, India
India: Cautious Optimism
by Pralhad Burli
A step forward, but will
A ll of a sudden, the cogs of government
policy have been set in motion. While
the government’s reform agenda momen-
the government retract?
tarily raised hopes, the implementation of The government decided to allow foreign
the reforms remains uncertain. The economy, players to invest up to 51 percent in multi-
however, is not out of the woods yet. Weak brand retail. This announcement opens up
industrial production, an erratic and delayed India’s retail sector for multinational retail
monsoon, muted global demand, and policy giants, but there are some restrictions. Retail
uncertainty cloud India’s economic outlook. stores can be set up only in cities with a popu-
Meanwhile, inflation remains elevated, and the lation of more than 1 million. The minimum
government’s woes arising from a high fiscal investment must be $100 million, and at
and current account deficits continue to con- least 50 percent of the investment must be in
strain the economy. Growth projections have back-end infrastructure within three years.
been lowered several times, and analysts pre- Moreover, state governments will have the
dict that India will grow at less than 6 percent right to decide whether or not they will allow
during the 2012–2013 fiscal year.
30 31
