04 January 2012

Economic Trends of 2012

The economic trends of 2012 are the consequences of the economic and political turmoil of the emerging economies which is determined by rise or fall in economic growth. This year, the Council on Foreign Relations, American nonprofit and nonpartisan membership organization, seeks the forecast of top six eminent economists to predict on the recent global economic trends for the year.


Gary Burtless - Political Polarization and U.S.

Gary Burtless the American economist, has pointed out in US, there is an increased division of political opinion due to culture wars, which initiated a polarized response from the public. The increased political polarization in the political system and the economic downturn in global stock market shares will lead to a policy difference which will impact the future policy making. The growing turmoil in the U.S political system will give a way to partisans in the American electorate voicing their own ideologies. Differences among the ruling parties, the White House and the Congress in economic and political affairs might lead to adverse obscurity taking a more critical turn.

From the business viewpoint, the two democratic parties- Republicans and Democrats and their split opinions has set diverse differences in trade policies and economic turns, which steered away from the objective laid down in Keynesian prescription which speaks of government regulations during economic depression. Richard Nixon, the President of the United States, commented "I am now a Keynesian in economics"- which was greatly favored by Democrats at one time. Conflicting with the Keynesian principles, the Republican Party accounts for high and low debt ceilings on public expenditure, govt. de-regulation to curb economic stagnation has made the present situation more volatile and complicated in decision making.

Speculations are on the stand of Congress and the president on arriving at a general consensus on major economic and political grounds are possible. However, the current budget may not support the implementation of certain economic laws on grounds of health, reform law as set by previous congress parties. Senate might leave vacant certain Placement office positions while the dilemma in political and economic ground might result in failure to formulate a budget plan which will impede the growth process which will hinder the continuous process of discharging the federal functions smoothly. It might further slow down its process of borrowing additional funds to support the normal policy operations. This trend will continue until one party or the other gains majority.

 Michael Spence-Global Volatility

Michael Spence

According to Michael Spence, the economic climate will be marked by instability in various economic and finance sectors which will impose the risk on summative national income, consumption, and investment. It will provide two perspectives to the global environment generating higher risks of international disasters and more concerns on Europe debt crisis, in terms of investment and economic growth rate.

In 2012, Europe will succeed in debt restructuring by accessing private capital derived from new programs on fiscal adjustment and structural reforms obtained from countries like Italy. This is largely supported by European Central Bank in sovereign debt markets regulating the financing needs for the Euro zone which is a challenge for the economic recovery. While on the other hand the Euro zone struggles to keep away fiscal centralization which is going to boost up Europe debt crisis which in turn is likely to disrupt the fiscal stability, thrust on reform movements and capitalization.

On the forefront, Unemployment and economic growth in the private sector declines in US till the presidential election raising a question mark on the fiscal stabilization, growth, and employment structure while public sectors pull away hands of support from investment to aid economic growth stabilization. This will lead the emerging economies to continue to remain in the state of debt crisis which hinders their growth further.

As a matter of fact the whole economic instability and risk emerges from the policy measures taken to aid stabilizing market economy by means of co-ordination with the developed nations. With the expected trend in political system which will continue to upgrade, economic and political situations will turn better.

 Yukon Huang- China's Rise Under Stress

Yukon Huang

China's growth has been marked slow as manifested in 2012.The leadership of the Chinese Communist Party known as the fifth generation of the Chinese Communist party will face significant challenges with enhanced economic and political influence on the economic growth. The economic growth rate will further slow down till 8 percent which will further lessen policy options but this is expected to be a good turnout for China. This will raise global concerns on increasing inequality, environmental degradation and corruption. This might also exhaust global trade if the trend of consumption pattern in China is higher.

While many apprehended an economic downturn, but for some, it is expected that Beijing might fight out the global economic slump. But it might lag behind in the economic growth as it moves on with a struggling infrastructure and unproductive financial institutions. The growing middle class demands for a more responsible supremacy. But it has been drawing inspiration from the Arab states to involve social agitation which might ignite political fragile movements.

Growing nationalism in China and Chinas despotic claim to control Beijing's maritime features, which includes islands, rocks and reefs have swayed deep concerns which has led its peer neighbors seek help from U.S Nations. The internal clash between China and U.S will pave the way of setting a new benchmark on their respective roles. As for Asian countries, they will be influenced by both the superpowers but will act and shift their positions according to their vested interest. A very fragile situation for China as the Party's leadership hesitates to make a strong choice.

 Thomas Philippon - Shortage of AAA Assets

Thomas Philippon

There would be a shortage of safe AAA assets in this year. The Sovereign credits of a sovereign country backed by financial resources serve as transaction assets which cater to Sovereign Lending and Borrowing. If the investors loss of faith in these assets, it might lead to market economic turmoil. The focus of creditors and speculators on the financial crises since 2007 will open up a futurist view which will open up new ways but the recent sovereign credit ratings will boost up boom-bust cycle which will target risk free assets and bond making investors more frantic to search and hold assets in the long run.

In contrast with the internet bubble which represents the rising level of equity markets, the sovereign credit boom was driven by more of safe asset producer category. The risky mortgage assets should be transformed into safe and risk-free assets, AAA-rated bonds, using the theory of financial engineering. The German fiscal plan to increase fiscal union in the euro area will be an indication of taking a responsible step towards building a more realistic approach.

There will be a more rationalistic approach in 2012 as it would be marked by significant expansion in the supply of safe assets and this would widen the gap between the choices of both the buyers and the lenders. An increased demand for safer assets is expected while the economic turmoil in the global world will rise higher. However, the safe assets will be misleading as they would be supported by mortgage-backed securities or sub-prime loans which lack the AAA ratings.

With increasing concerns of safety and security, the tendency of the borrowers are more on repaying as their earnings go up with the rising economic growth. While economic growth is determined by the income of the smart risk takers which involves a major share of savings on the part of the risk bearer. Growth freezes if there is no saving for the risk - taker making it difficult for even the safe borrower fall into a risk of making large investments.

 Jacob Kirkegaard -A New Appetite for Risk

Jacob Kirkegaard

Due to the growing panic in the financial market since late 2009, the Euro has been pushed to a point where the observers are now openly questioning the survival of the common currency. At the time of crisis it was clear that the European response was too slow and timid to restore confidence back in the Euro.

Keeping in view the political divisions among the European countries and the demand for complex democratic validation, in (at least) seventeen member states of any decisions taken, being able to change this dynamic by the elected leaders seems to be unlikely.

In 2012, in the Euro area, the new trend seems to be getting manifested in the financial area rather than in the political area. At one stage the economic fundamentals of the euro area and the policy responses of its governments would ensure that market fears surrounding Italian government debt will be outstripped by the greed of yield-hungry investors.

Investors will then start dropping low returning German bonds, which are not wealth boosting in the time of inflation and instead start purchasing Italian bonds that are high yielding and at the same time no longer that risky. This will decline the interest rates for Italy and will reduce the severity of the inflation and pull up the entire euro area economy from the current "bad equilibrium" to a better one.