The economic crystal ball

Predicting the economic ramifications in the current year, and the rationale behind the forecast
The economic outlook for the world is pretty clear for 2012. It’s definitely clear; even if it isn’t quite so pretty. As I look deep into my crystal ball, vying to prognosticate the year, that is already well and truly on its way; there are quite a few aspects under the forecast gun that are going to be inevitable, some are debatable and others are mere hunches on my part. All the same, only time will tell about the authenticity of this little spherical crystal ball – metaphorical yes, but it encompasses more than its fair share of realism.
The pictures on the surface simply read; European recession, insipid growth in the United States of America, and a precipitous slowdown in China and a multitude of emerging market economies. I can also see Asian economies being exposed to China – no big surprises there –, Latin America being exposed to lower commodity prices and Central and indeed Eastern Europe being exposed to the monster we call the eurozone. The volatility of the ever volatile Middle East is resulting in gargantuan economic ramifications – all over the globe – and escalating oil prices are becoming a menace for all the stakeholders as well, thanks to our dear friend Iran.
While the exact measurements might not be quite palpable in the crystal ball, there is not even the slightest of question marks over the inevitable eurozone recession. US’s pedestrian growth might be further halted in the months to come; owing mostly to the fiscal drag, deleveraging in various sectors and political gridlocks. UK is double dipping; again with the same problem of insufficient growth. Japan is dealing with a change at the helm of government and in dire need of structural reforms.
At the same time, the major chinks in the armour of Chinese economy are becoming all the more conspicuous. Its growth model is not quite the real deal that it was touted as in the past, falling property prices have a menace of their own and the construction boom looks like being decisively stalled. There is no doubt that the Chinese leaders have their work cut out. And they’re definitely not alone; with the US, Europe and Japan as well finding themselves in a similar fix.
Current-account imbalances between the US and China – among other emerging economies – and also within the eurozone jurisdiction, continue to remain large. To restore order, lower domestic demand in over-spreading countries with large deficits and lower trade surpluses and real currency appreciation is the need of the hour. To restore growth, nominal and authentic depreciation is needed to ameliorate trade balances among over-spending countries and surplus countries need to bolster the domestic demand.
It goes without saying that the policy makers are short of new ideas – at least short of the ones that would border on being effective. Experts say that currency devaluation is a zero-sum game, and also that most of the countries don’t have the magical wand that would allow them to depreciate and improve exports at the same time. Fiscal policy is also restrained and in the political realm the G-20 has paved for the possibility of an ironical – yet actual – G-0. The restoration of growth is no mean task; and while with every difficult task comes the possibility for the leaders to make their mark, it would take a collective effort from the Who’s Who of global politics to ensure that things improve in 2012 – at least that’s what the crystal ball tells me.

The writer is a freelance contributor and is currently working for Philip Morris, Pakistan