Published in the Telegraph-Journal 14th December 2012
For more than three years, business scribes have been musing about green shoots, economists have been reporting rising output and investors have been realizing sizable returns on their equity portfolios. Aggregate statistics had it that the recession had been beaten and economies were on the upswing even though, for many households, this good news seemed like it was happening somewhere else. Millions of jobs have vanished in the U.S., many permanently. Home-loan defaults piled up and ongoing corporate restructuring rendered the future of many workplaces uncertain. On the eve of 2013, many are asking if the recovery that started in the last months of 2009 will bring more stable relief in the coming year.
The answer may be not be a simple one. It’s true that a temporary lift beginning in 2009 provided some relief. But there were two sources of this upturn. Factories that idled when global demand collapsed sparked to life to replenish inventory. Massive amounts of government monies were partial compensation for weak private sector investment. In conjunction with public spending increases, taxes were slashed and central banks dramatically reduced interest rates. These were band-aid solutions, but they kept the recession from being even more cruel.
In the waning weeks of 2012, warehouses are fully stocked. Production essentially is on hold and waiting for signs that a fulsome demand for appliances, cars and clothing can justify a return to full production. But there is little chance of that happening until nervous consumers reduce their debt and re-establish some optimism. This seems less likely as long as unemployment remains high. In the interim, governments will not be able to fund the recovery much longer. The financial system has been flooded with cash as many central banks have cut interest rates to or near zero. While public spending can remain high, in most countries further increases would not be practical. So 2013 may not be the year of recovery that many are looking for.
Some economists see a much darker potential future that may involve the dissolution of globalization. The euro zone is at the heart of this bleak picture. The euro zone’s GDP is forecast to move forward by less than 0.5 per cent in 2013 with Germany and France barely advancing. The economies of Greece, Spain and Portugal have been shrinking for more than four years. One consequence of this global disaster is that anger continues to mount with political leaders, even in those countries not directly experiencing the harshest elements of the recession.
“The really worrying thing is a 40 percent chance the euro zone might break up altogether…over the next couple of years or so,” said Robin Bew, editorial director and chief economist at the Economist Intelligence Unit.
European banks have traditionally been the source of approximately 80 per cent of trade financing in emerging markets. In the shadow of the financial crisis, Europe’s undercapitalized banks are being forced to repatriate that capital. It is not clear that U.S., Japanese or Chinese banks are in a position to fill the gap. Capital scarcity combined with the need for banks to retain more capital is inhibiting global trade financing. This in turn threatens to accelerate the process of deglobalization.
In the U.S. economy, these adverse conditions do not provide the economic environment necessary to achieve the level of robust growth required for full employment. More disturbingly, the increase in economic and political stress resulting from the weakening of globalization serves to increase investor uncertainty. The increase of investor nervousness has made the financial environment even more risk averse.
Globalization, with all its faults, drawbacks and shortcomings, has been at the centre of prosperity creation for more than thirty years. There have been suggestions that the globalization model may already be obsolete in the United States, where exports are less than 15 per cent of total trade and where rapid Chinese wage inflation, automation, robotics, new software-based cost-cutting manufacturing technologies and the precipitous erosion of the power of organized labour has created conditions not yet fully understood. This phenomenon should set off alarm bells everywhere. Globalization is at risk of destruction, with no replacement in sight.