The Economic Fundamentals of 2013

The global economy this year will exhibit some similarities with conditions prevailing in 2012 – no surprise there. But there will be some important differences, as fiscal austerity spreads to more advanced economies, the risk of a hard landing in China rises, and the threat of war in the Middle East grows.

NEW YORK – The global economy this year will exhibit some similarities with the conditions that prevailed in 2012. No surprise there: we face another year in which global growth will average about 3%, but with a multi-speed recovery – a sub-par, below-trend annual rate of 1% in the advanced economies, and close-to-trend rates of 5% in emerging markets. But there will be some important differences as well.

Painful deleveraging – less spending and more saving to reduce debt and leverage – remains ongoing in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop most advanced economies this year, rather than just the eurozone periphery and the United Kingdom. Indeed, austerity is spreading to the core of the eurozone, the United States, and other advanced economies (with the exception of Japan). Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries.

With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government.

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