The Global Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued No. 9 • December 19, 2012
Global economy finishes the year weakerthan it started
During the second half of the year the economy hasweakened, not only in terms of industrial productionbut also in actual GDP in large parts of Europe andAsia. Global trade has, with few exceptions,stabilized at the 2011 level, or fallen significantly asin Japan's case. The recovery has strengthenedmainly in the US. Why does the end of 2012 lookworse than the beginning? Here are some reasons:
In 2010 and 2011 the economy seemed tobe strong in the wake of the recovery afterthe financial crisis and recession in 2008-2009. These “catch-up” effects disappearedin the latter part of 2011 and 2012.
As we approached the first half of 2011 and2012 the central banks increased liquidity,which strengthened confidence in thefinancial markets and to some extent thereal economy. The impact subsided duringthe second half of 2011 and 2012 andactivity slowed.
Fiscal austerity and tighter credit in Europehave led to higher unemployment andweaker confidence among businesses andhouseholds. The euro zone hasn’t beenable to avoid a recession.
The BRIC countries have launched a newstimulus phase through monetary and fiscalpolicy, but not of the same scope as in2008-2009, since inflation has stayed fairlyhigh and/or the bad loans in the financialsystem make it hard to repeat expansiveeconomic policies. It also seems that thestimulus is not having the desired effect,especially in Brazil and India.
Political uncertainty is higher than normalbecause activity in the US is affected by thefiscal cliff at the same time that concernsabout new political crises in the euro zonehave reduced the willingness to invest andconsume.
Another factor in Japan's case is itsdeteriorating relationship with China, whichhas contributed to a boycott of Japaneseproducts and reduced auto exports toChina. See our Asia Analysis no. 15, whichwas recently published.
Optimists have defeated pessimists, so far
Only 43 of the 83 economists the Financial Timessurveyed in January predicted that the euro wouldbe intact at the end of the year. And that was at apoint when institutions had begun to strengthenthanks to the introduction of the fiscal pact.Pessimism took over, especially among Anglo-Saxon analysts and journalists. Not until EuropeanCentral Bank President Mario Draghi uttered thewords, “…and believe me, it will be enough,” did thefinancial market’s confidence in the currency uniongrow. When the German constitutional court ratifiedthe ESM bailout package and the ECB announcedthe details of the OMT, speculation about a eurocollapse eased.During the early summer the focus was still onGreece, but after a new election there wasoptimism that the country would decide to reform.During the fall concerns returned, although fewerpeople are now anticipating a Grexit. Some arespeculating that Greece will leave in a few years,but I find it hard to see why it would if the worst ofthe panic has died down and it continues to receivesupport from the euro zone. More debt write-offswill be needed, however, including public debts.The reason this isn’t being done now is the risk itwould hurt Spain and Italy's prospects of receivingsupport. Why would German taxpayers want to helpSpain when they already know that tax moneyrecently given to Greece has already been lost?For German Chancellor Angela Merkel it is aquestion of maintaining the will to reform within theeuro zone and retaining power. The muddling-through scenario has survived, probably because ofa lack of political alternatives for the 17 eurocountries. The financial market is getting used tothis and understands the political commitmentinvolved in rescuing the euro zone and the EU.There are still overhanging risks of a dissolution,since you can never discount that political eventscould endanger the cooperation. This means thatthe pessimists may still be right, though thelikelihood of that happening has fallen considerably.One of the most important things that havehappened this year is the strengthening ofinstitutions and confidence. Many puzzle pieceshave to fall into place, however. The euro zone hasto develop the Eurobond market, banking union andfiscal cooperation. Democratic aspects certainlyhave to be included, considering the democraticdeficit in how decisions are made within the eurozone.