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Mixed Outlook For The Global Economy « Back
Selina Harrison, October 2012
Each time the eurozone starts to seem more stable, the crisis rears its ugly head again. The region’s depressed economy has had a negative impact on growth elsewhere in the world, and caused a deceleration of most major economies. As the global economy seems to take two steps forward followed by three steps back, in August Deloitte produced a ‘Global Economic Outlook’ report estimating the growth prospects for different regions of the world in Q3 2012.


Despite reaching a positive turning point in Q1 2012, the region’s economic woes returned with full force in Q2 2012 and are threatening the viability of the eurozone in its current form. The reasons are political as well as economic: the rise of the radical left in Greece aroused new fears about a Greek exit from the eurozone. Meanwhile, to offset non-performing loans from the real estate bubble, the Spanish banking sector has applied for a €100bn bailout. The eurozone’s gross domestic product (GDP) stagnated in Q1 2012 and was marginally (0.1 percent) below the level it achieved in Q1 2011. Meanwhile unemployment lingers at 11.2 percent, the highest unemployment rate in the history of the eurozone.

The renewed crisis has generated many ideas about how to solve it. “The proposed solutions on a European level include fiscal union, the introduction of euro bonds, European deposit insurance, and a banking union. Yet, these proposals would require a much higher degree of integration than currently exists in Europe,” purports Dr Alexander Börsch, head of research at Deloitte Germany.

Indeed, realising a true fiscal union on a European level, for instance, would require completely overhauling the EU’s character. It would require a harmonisation of fiscal policies, and would need to span very idiosyncratic European welfare states and tax systems. The associated loss of national sovereignty would be unprecedented in EU history and may prove difficult. Even so, this action would need to be undertaken quickly by EU leaders to stabilise the eurozone and prevent contagion to other economies.


The financial crisis of 2008 started in the US and spread to Europe. However, this year the tables have turned. Europe’s recession will be transmitted to the US through trade, European investment in the US, banking, and the performance of US companies with material European operations. Indeed, as Europeans divest themselves of US based assets, this contracts bank reserves in the US, reducing the availability of credit. Furthermore, “as the Europeans sell their US assets and go home, it puts downward pressure on prices while reducing the availability of capital for investment in the US,” observes Dr Carl Steidtmann, chief economist at Deloitte Research.

Meanwhile, as uncertainty over Europe has grown, so too has concern over the fiscal cliff faced by the US government, the future status of healthcare reform and other matters. Responding to the growing level of uncertainty, since the first of the year, cash holdings by US commercial banks have risen 8 percent to $129.9bn. However, this trend has deepened the Federal Reserve’s liquidity trap, which occurs when the demand for money rises and offsets the central bank’s efforts at increasing money supply.

While long term unemployment and a lack of business creation is also having a negative impact on the economy, widespread deleveraging is also stunting growth. Indeed, over the past 80 years, deep recessions have always been followed by robust recoveries in which the private sector came out of the recession and took on more debt. That has not been the case this time and households, businesses, and financial institutions have all been aggressively reducing debt, which whilst necessary for development, is money that could have gone to current spending and in turn, leads to slower growth. As such, with the recession spreading in Europe, the ability of the US economy to continue growing in the face of these factors seems increasingly unlikely.


The EU is China’s largest export market and while exports to the US were up 23 percent in May, China’s exports to Europe were up only 3.2 percent. Another factor slowing the Chinese economy is the lag effect of last year’s monetary policy tightening, which had a negative impact on the growth of credit. Meanwhile, Chinese company profits declined in May for the second month in a row. The result of all these events has meant that real GDP growth has declined for five consecutive quarters.

However, at present, “the Chinese government is trying to strike a balance between the economic slowdown and its banks’ troubled balance sheets. Authorities are following a narrow path designed to minimise the downturn while avoiding a deeper financial crisis,” says Dr Ira Kalish, director of global economics at Deloitte Research.

Indeed, at the height of the recession in 2008, in order to offset the negative impact of weak global demand, China implemented a massive monetary and fiscal stimulus. However, much of that stimulus money was loaned by state-run banks to local governments, which are now having trouble repaying the debt. Now that China is slowing again, the central government is reluctant to repeat such a policy. Instead, gradual easing of credit conditions, targeted spending on some infrastructure projects, tax incentives for consumers to spend on appliances, and more lending to small businesses are some of the steps the central government is taking to boost growth.


The UK fell back into a ‘double dip’ recession in Q4 2011 and Q1 2012. In fact, the economy has scarcely grown in the last 18 months. The level of UK output today is 4.3 percent lower than it was on the eve of the recession in late 2007.

The squeeze on public spending, aggravated by tax rises, has weakened UK consumer spending power and contributed to the UK’s slow growth. Further, household spending in the UK is 5.2 percent lower today than in late 2007.
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