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Global Challenges in 2013

Monday, December 31, 2012

As 2012 draws to an end, the US economy staggers on without achieving strong growth, the euro-zone remains in crisis and Chinese growth has slowed; all of which presage bad news for 2013.

The list of challenges facing the global economy going into 2013 is long and serious.

These include: the fiscal challenges facing many OECD countries; the uncertain longer term effects of the monetary policies being adopted; deregulation and rebalancing in key sectors in developing economies; sectoral issues such as real estate bubbles; uncertainty over commodity prices (and in particular oil); and food inflation.

Added to these factors is the political uncertainty surrounding the euro-zone: i.e. whether the necessary restructuring will be in place quickly enough to save the euro-zone. If not, then a Greek exit in late 2013 or in 2014 will impact negatively on growth conditions. In terms of fiscal challenges, government austerity measures are taking around 0.5-1.0 percentage points off growth, with the threat of the American ‘fiscal cliff’ being a major threat to US and global growth.
The effects of monetary policy being pursued by central banks in the OECD countries are less clear cut, but in the medium term they will impact on increased volatility in commodity prices and exchange rates, asset bubbles, higher inflation, and potential market disruptions as exit strategies are implemented. Uncertainty also centres on how long the ‘tail’ created by these factors will be.

If either the euro crises or US fiscal cliff scenarios are resolved then there will be downward pressure on oil prices. However, there are large (and increasing) geopolitical tensions that could boost oil prices in the short term. Another weak growing season (in the US and elsewhere) in 2013 could further exacerbate food price inflation globally, with accompanying political and economic risks. Food inflation will also curtail the ability of democratic and non-democratic governments to implement the fiscal austerity measures necessary to restore long-term economic growth.

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