As the U.S.
economy slogged through a recession following the credit crisis in 2008 and the
E.U. was weighed down by the ballast of austerity in the most indebted states,
developing economies, including those of China and India, kept the world
economy afloat. As a group, those economies grew 7.4% in 2010, 6.2% in 2011,
and 5.5% in 2012. In keeping with this trend, the Global Economic Outlook of
the Conference Board predicted 4.7% for 2013. Fortunately, the Board also
predicted a pick-up in consumer demand in the U.S. to pick up the slack. “The
only really short-term positive impact that we can have is that we can see a
faster return of demand, particularly in the U.S.,” the Board’s chief economist
said. As of 2012, such a return was not necessarily “in the cards.” The
pessimism can be seen in the projected world economic growth of 3 percent,
which is lower than the 3.2% expected in 2012 and the 3.8% achieved in 2011.
That the projected growth rate of only 1.8% for the U.S. in 2013 is less than
the projected 2.1% for 2012 indicates that increased demand in the U.S. was not
expected to fully pick up the slack for the slowing-down of the developing
economies. Here I want to point to a major factor in the U.S.: the possibly
impending “fiscal cliff” of cuts in the federal budget and the end of the Bush
tax breaks that were scheduled to begin on January 1, 2013 unless
Congress and the White House could come to a legislative agreement beforehand
on an alternative way of holding down the deficits. Presumably that way would
have a less recessionary effect.
In doing
political risk analysis, one might be tempted to weigh in on predictions of a
grand deal. I submit that predicting whether one comes together, as well as its
differential economic impact would be, is not merely difficult, but also nearly
impossible—unless one has “inside information” from the key players in
Washington. Political risk analysis is not a sort of crystal-ball operation.
Predicting the future is notoriously difficult for us mere mortals. However, we
can assess how the prospect of a possible event, such as the “fiscal cliff,” is
being played out in real-time. In other words, it is possible to determine
whether the “fear-mongers” are exaggerating the probably economic impact (and
why!). Assessing the severity of the worst-case scenario can thus be
recalibrated, with implications for strategic planning.
Should the
automatic cuts in the U.S. federal budget and end of the Bush tax cuts begin on
January 1, 2013—a combined hit of over $500 million in that year alone—a
“recessionary toll” was generally held to be the result. That is to say, the
domestic demand made possible by increasing discretionary spending would be
reduced as government spending decreases and federal income taxes increase. The
Global Economic Outlook pointed to the prospect of Congressional and White
House negotiations potentially obviating the sequestration as bearing on the
global economic growth. Even though Congressional leaders could be counted on
to rise to the occasion in delivering on sufficient dramatics at the last
minute, the general public could not be sure that the denouement would involve
a quick swerve away from “fiscal cliff” as though in some 1940s film noir.
Just by the
numbers—around $500 million in 2013—the Conference Board may have been
overstating the recessionary impact of the sequestration in an economy whose
GDP was over $16 trillion. For one thing, the momentum in 2012 was in the
direction of increasing demand. Also, corporate planning may have already “hedged
their bets” so “going over the cliff” would not actually involve much change,
at least initially, on their part.
I must add
here the caveat that I not an economist. Hence, I do not have the
quantitative expertise necessary to "run the numbers"
on how much GNP would decline from the sequestration. However, I have run
economic regressions, so I have some sense that the actual variables in a political economy
are not as formulaic as those in a regression equation. The inherrent
uncertainty in the political dimension in particular renders suspect the
“empirical social science” approach of modern economics as determinative in
political economy. Put another way, the political-risk-analysis dimension of an
economic growth projection introduces considerable uncertainty in an otherwise
quantitative economic numbers game, which might itself be overly deterministic
or "exact." Even if we could untangle the myriad political
factors going into political negotiations beforehand, we would still have to
accept the uncertainty that is inherent in predicting the future, especially where
human decisions are in the mix. That is to say, the future cannot be known
for certain, given the respective natures of time and human beings.
I suspect the
differential economic impact between a possible deal and sequestration was
being exaggerated, particularly by the media but also by officials in
government and CEOs—all of whom had subterranean reasons for doing so. The
media’s “fiscal cliff” label alone illustrates the proclivity to exaggerate. It
is not as though a deal would have absolutely no drag on the economy, even if
significantly less than that of sequestration. However, in distinguishing
between “some” and “more” in terms of a drag on consumer demand in the U.S.,
the impact on the overall global economic
output may be less than the “fiscal cliff” rhetoric implies because the world
is much more than the American union. In other words, if the “differential” in
terms of economic impact between a deal to cut the deficit and sequestration
turns out to be less than portrayed in 2012, the resulting impact on the larger global
economy would also be less.
In terms of a
prognosis for 2013 from the vantage-point of late 2012, my best guess was
that it would be largely similar to 2012 globally—the U.S. and E.U. continuing
to climb out of deep recessions while struggling to inflict austerity on
themselves for their own good, and the developing economies continuing to
cooling their heels from growth rates that were probably unsustainable anyway.
In terms of international business prospects, “continued languid” rather than
“fiscal cliff” would be my headline.
Source:
Matthew Walter, “U.S.
Seen Propelling Growth of Global Economy in 2013,” The Wall Street
Journal, November 13, 2012.
