As 2013 Begins, The Downside Risks For The Global Economy Are Gathering Force.
Here Are The Big Risks That Lie Ahead For The World In 2013
Nouriel Roubini: 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….
The world has not yet escaped the risk of a collapse in the global economy despite some renewed confidence heading into 2013, founder of the World Economic Forum Klaus Schwab said.
Swiss economist Mr Schwab, speaking on the eve of the elite annual gathering in the Swiss mountain resort of Davos, called for business and government leaders to focus on “cautious realism” and a recovery of public trust to avoid another major financial crisis.
“The problems and the risks have not gone away,” he said in an interview with the Associated Press. “The world economy may still confront a collapse if very negative constellations occur.”
Growing fears of a 1994 scenario.
We’ve been seeing analysts increasingly talk about a “1994”-style situation playing out in the market.
What does that mean?
Basically, the market was caught off guard that year by a surprise Fed tightening, and Treasuries got hammered.
Nobody expects a real “tightening” soon, but there is more talk about it, and there’s a lot of talk about a “Great Rotation” from fixed income back to equity (though that might also be wishful thinking, as opposed to actual prognostication).
Anyway, M&G Investments on Twitter has a great few tweets about what happened to other markets in 1994. It’s all well and good to talk about a jump in rates and carnage in fixed income, but if your neck of the woods is no better, then it doesn’t matter.
The Little Train That Couldn’t Anymore
The economic performance of American presidents tends to deteriorate during their second term
THE economic auguries for Barack Obama’s second term are not good. By comparing the changes across eight economic indicators (GDP, industrial production, household incomes, house prices, unemployment, consumer confidence, stockmarkets and federal debt) during their presidential terms, The Economist has analysed the economic performance of all 11 two-term presidents since Teddy Roosevelt took office in September 1901. The first chart below shows that the average change in each of these economic indicators. With the exception of federal debt, which rises at a slower rate than in the first term, on average, all these indicators deteriorate. The economic performance of the 11 two-term presidents worsens by some 4.2 percentage points on average in their second terms compared with their first.
Preparing for the Unthinkable: A US Default?
The U.S. has defaulted once before, in 1979, when lawmakers were blamed in part for allowing negotiations to go down to the wire before raising the debt ceiling.
After that, back-office errors at the Treasury, caused the government to be late in redeeming three series of Treasurys bills, according to an academic paper by Terry Zivney and Richard Marcus published in the Financial Review in 1989. The failure caused rates to rise, and the government faced lawsuits from investors hurt by the delays in repaying the bonds, they said.
Markets now are far more complicated. Battles over ownership, interest paid or owed and a host of other issues relating to the transfer of the securities would likely be mired in legal disputes. U.S. debt is also considerably higher, and there is greater foreign ownership of Treasurys. The economy is also more vulnerable, making the risk of a creditor exodus a far more damaging prospect for the country.
Inequality Threatens ‘Global Society’: WEF Founder
Inequality risks destabilizing “global society”, Klaus Schwab, the German economist who founded and chairs the World Economic Forum, told CNBC on Tuesday.
Speaking in the Swiss alpine village of Davos, at the start of the Forum’s annual get-together, Schwab said:
“We have too large a disparity in the world; we need more inclusiveness… If we continue to have uninclusive growth and we continue with the unemployment situation, particularly youth unemployment, our global society is not sustainable.”
Why the Euro Zone Crisis is Over…Until September
Europe’s economies and markets have nothing to fear from the defeat of Chancellor Angela Merkel’s party in German regional elections this weekend as the euro zone crisis will be on hold until Germany’s national elections in September, analysts told CNBC on Monday.
“You simply should not read too much into this for the federal election. We’ve still got eight months to go… I still think Angela Merkel is still going to be Chancellor of Germany in twelve months’ time, ” Alastair Newton, senior political analyst at Nomura said on CNBC Europe’s “Squawk Box”.
On Sunday, Merkel’s conservative coalition lost regional elections in Lower Saxony, one of the country’s most populous states. The narrow one-seat victory for the center-left Social Democrats (SPD) and Greens in one of the country’s bellwether states has revived the opposition’s hopes for defeating Merkel in September’s national election.