In the last four weeks, I have traveled to Sofia, KualaLumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo,Istanbul, and throughoutthe United States. As a result, the myriad challenges facing the global economy were never far away.
In Europe, the tail risk of a eurozone break-up and a loss of market access bySpain and Italy were reduced by last summer’s decision by the European CentralBank to backstopsovereign debt. But the monetary union’s fundamental problems – low potentialgrowth, ongoing recession, loss of competitiveness, and large stocks of privateand public debt – have not been resolved.
Moreover, the grand bargain between the eurozone core, theECB, and the periphery – painful austerity and reforms in exchange forlarge-scale financial support – is now breaking down, as austerity fatigue inthe eurozone periphery runs up against bailout fatigue in core countries likeGermany and the Netherlands.
Austerity fatigue in the periphery is clearly evident fromthe success of anti-establishment forces in Italy’s recent election; largestreet demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout ofCypriot banks, which has fueled massive public anger. Throughout the periphery,populist parties of the left and right are gaining ground.
Meanwhile, Germany’s insistence on imposing losses on bankcreditors in Cyprus is the latest symptom of bailout fatigue in the core. Othercore eurozone members, eager to limit the risks to their taxpayers, havesimilarly signaled that creditor “bail-ins” are the way of the future.
Outside the eurozone, even the United Kingdom is strugglingto restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, whileanti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary.
In China, the leadership transition has occurred smoothly.But the country’s economic model remains, as former Premier Wen Jiabao famouslyput it, “unstable, unbalanced, uncoordinated, and unsustainable.”
China’s problems are many: regional imbalances between itscoastal regions and the interior, and between urban and rural areas; too muchsavings and fixed investment, and too little private consumption; growingincome and wealth inequality; and massive environmental degradation, with air,water, and soil pollution jeopardizing public health and food safety.
The country’s new leaders speak earnestly of deepeningreforms and rebalancing the economy, but they remain cautious, gradualist, andconservative by inclination. Moreover, the power of vested interests thatoppose reform – state-owned enterprises, provincial governments, and themilitary, for example – has yet to be broken. As a result, the reforms neededto rebalance the economy may not occur fast enough to prevent a hard landingwhen, by next year, an investment bust materializes.
In China – and in Russia (and partly in Brazil and India) –state capitalism has become more entrenched, which does not bode well for growth.Overall, these four countries (the BRICs) have been over-hyped, and otheremerging economies may do better in the next decade: Malaysia, the Philippines,and Indonesia in Asia; Chile, Colombia, and Peru in Latin America; andKazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia.
Farther East, Japan is trying a new economic experiment tostop deflation, boost economic growth, and restore business and consumerconfidence. “Abenomics” has several components: aggressive monetary stimulus bythe Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in2014 to rein in deficits and debt; a push to increase nominal wages to boostdomestic demand; structural reforms to deregulate the economy; and newfree-trade agreements – starting with the Trans-Pacific Partnership – to boost trade andproductivity.
But the challenges are daunting. It is not clear ifdeflation can be beaten with monetary policy; excessive fiscal stimulus anddeferred austerity may make the debt unsustainable; and the structural-reformcomponents of Abenomics are vague. Moreover, tensions with China overterritorial claims in the East China Sea may adversely affect trade and foreigndirect investment.
Then there is the Middle East, which remains an arc of instability fromthe Maghreb to Pakistan. Turkey – with a young population, high potentialgrowth, and a dynamic private sector – seeks to become a major regional power.But Turkey faces many challenges of its own. Its bid to join the European Unionis currently stalled, while the eurozone recession dampens its growth. Itscurrent-account deficit remains large, and monetary policy has been confusing,as the objective of boosting competitiveness and growth clashes with the needto control inflation and avoid excessive credit expansion.
Moreover, while rapprochement with Israel has become more likely, Turkey facessevere tensions with Syria and Iran, and its Islamist ruling party must stillprove that it can coexist with the country’s secular political tradition.
In this fragile global environment, has America become a beacon of hope? The US isexperiencing several positive economic trends: housing is recovering; shale gasand oil will reduce energy costs and boost competitiveness; job creation isimproving; rising labor costs in Asia and the advent of robotics and automation are underpinninga manufacturing resurgence; and aggressive quantitative easing is helping boththe real economy and financial markets.
But risks remain. Unemployment and household debt remainstubbornly high. The fiscal drag from rising taxes and spending cuts will hitgrowth, and the political system is dysfunctional, with partisan polarizationimpeding compromise on the fiscal deficit, immigration, energy policy, andother key issues that influence potential growth.
In sum, among advanced economies, the US is in the bestrelative shape, followed by Japan, where Abenomics is boosting confidence. Theeurozone and the UK remain mired in recessions made worse by tight monetary andfiscal policies. Among emerging economies, China could face a hard landing bylate 2014 if critical structural reforms are postponed, and the other BRICsneed to turn away from state capitalism. While other emerging markets in Asiaand Latin America are showing more dynamism than the BRICs, their strength willnot be enough to turn the global tide.