Moody's chief economist Mark Zandi cites three reasons to be bullish about the U.S. economy: a housing revival, the end of deleveraging, and a healthy corporate sector that will be ready to invest in 2013. CFR's A. Michael Spence also thinks that 2013 augurs better for the world economy but cautions that lagging employment and income inequality will hamper a robust recovery.
In contrast, CFR's Robert A. Kahn warns that Europe's debt crisis is far from being solved and that without growth, "we are likely to see Europe again at the brink." The Century Foundation's Mark Thoma believes that a reevaluation of monetary policy in the United States, and possibly the Bank of England, could help lower the European Central Bank's guard against inflation in the coming months.
Carnegie's Yukon Huang predicts that even as the currency war between China and the United States recedes, the battle over foreign investment and technology transfer policies will continue to escalate in the coming months.
A. Michael Spence, distinguished visiting fellow, Council on Foreign Relations
The economic outlook for the United States in 2013 is marginally brighter. The economy is adapting structurally, albeit slowly, to an altered and more sustainable growth pattern. The deleveraging process is further along, which, in turn, has spurred domestic demand. A divided Congress appears to be serious about reducing debt and long-term non-debt liabilities, and may come together around a credible stabilization path that will reassure business, reduce uncertainty, and boost investment. However, disruptive technology, global market forces, the education gap, and a skills deficit mean that long-term unemployment will remain a problem. Looser monetary policy, designed to buy time for politicians to enact needed policy changes, may push the economy back toward the defective leveraged-growth model and delay long-overdue structural adjustments.
Europe experienced a substantial decline in systemic downside risk in the summer of 2012 as a result of credible reform momentum in Italy and Spain, as well as conditional but strong commitment by ECB and the eurozone core to stabilize the banking sectors and the sovereign debt markets while those reforms take effect. Political uncertainty surrounding upcoming elections may cause a setback, but the most likely outcome is negative growth and high unemployment (especially for the young), not a disorderly unwinding of the eurozone.
Generally, the emerging economies look to be faring better. In 2012, the ongoing crisis in the eurozone retarded growth, but it did not completely derail development. China, entering the complex middle-income transition, experienced a bout of systemic risk associated with its leadership transition and a decadelong decline in reform momentum. That risk has declined with a successful leadership handoff and early signs of a forceful commitment to reduce corruption, alter the role of government in the growth model, and to deal with major social issues.
On the whole, the global economy, while not yet free of downside risk, appears set for a year of transition to better-balanced economic growth, albeit with lagging employment and income inequality continuing to hamper a robust recovery.
Robert Kahn, Steven A. Tananbaum senior fellow for international economics
Europe's challenge for 2013 will be sustaining support for economic reform, maintaining market confidence, and making progress on a banking and fiscal union. This will require, above all, growth. On this count, there is reason for pessimism.
The International Monetary Fund projects only 0.2 percent growth in Europe next year, and many private forecasters are more pessimistic. A weak global environment means exports may be less of a driver for growth than it was in 2012. Domestic demand has stalled and will continue to be damaged by planned fiscal consolidation and a weakened financial system that is hesitant to lend. The looming fiscal cliff in the United States, as well as growth uncertainties in Asia, add to the downside risks.
Against this backdrop, markets and politicians continue to operate on different timelines, with markets demanding quicker action than European policymakers have been willing to provide. More progress is needed on reducing debt in the eurozone periphery, but Germany is unwilling to address the problem before its September 2013 elections. Banking reform is similarly on a slow track: While an agreement has been struck on a single supervisory mechanism, it will not be implemented before 2014, and a full banking union remains a distant goal. Add in continuing concerns over a Greek exit from the EMU, uncertainty surrounding Italian elections, and growing opposition to reform throughout the periphery after years of deep recession, and you have a volatile mix.
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