Investors Reminded that Economic Conditions are Fragile

 

While a lot has been said about the “fiscal cliff” in store for the U.S. when tax credits expire and the debt ceiling must be addressed, the fact is that there is a “global economic cliff” and the U.S. teetering on the edge with Europe and emerging markets like China and India. The idea of a “cliff” is a very accurate description of the situation though so oft used that it has lost a lot of its punch. Between now and the end of the year there is expected to be some resolution of these fiscal problems if and only if our political leaders can make the hard decisions needed to avoid a severe double dip recession. Rana Foroohar writing for Time magazine has done a great job of analyzing the problems and expected outcomes.

Foroohar points out that the United States is in better shape than Europe. Economists predict positive growth of 2% for the rest of 2012. Unfortunately, much of our market is in Europe and, as they go, so will our economy. It is an election year and Congress has yet to propose a productive growth plan. With all this uncertainty and political posturing there is little to look forward to by year-end in the way of progress. The outlook for the economy remains to be the same slow job growth, flat wages and greater sensitivity to global instability.

In Britain they have coined the term “omnishambles” to describe the complex unraveling of policies in Europe and their own budget in particular. When the euro was created in 1999, it was done with good intentions in a much more comfortable economic time. Since the 2008 recession the euro-zone has been rocked like the rest of the world as each nation struggles to take care of their interests rather than put forth a united plan. While Germany has been thrifty, nations like Greece, Spain and Italy have spent well beyond their means. Germany does not want to be the “euro bank” for other countries who cannot handle their finances. Unless Greece can move forward with an acceptable austerity plan they will drop out of the euro-zone. Spain, Italy and Portugal are likely to go down too without a bailout. The euro could be destroyed unless there is real political integration. As it stands, there will be no economic growth within the euro-zone nations, according to economists, unless Germany is willing lead them through this crisis.

Unlike in the past, emerging markets are slowing too. China needs to rethink its growth model to include both economic and political reform to encourage their growing educated middle class. Economists predict their growth to continue for the rest of the year at an 8% rate compared to the strong 10% only 2 years ago. Meanwhile it is a time period of change within the country and new leadership will be taking over the Communist Party Politburo by the end of the year, much like the United States election year doldrums. Those who are in the wealthy minority are closely connected to the Communist Party. They profit from the status quo and are benefiting from the real estate boom supported by Party insiders. Serious change is unlikely in the short-term.

In the next few months look for some resolution in Europe as Greece struggles with their austerity measures. If there is a collapse of the euro, economists predict that there is a 40% chance the United States will be thrown into a deep double dip recession. The world’s major economies are all connected and the root of the problems in every case can be traced to dysfunctional politics.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.