This, Mr. President/President-elect, is the world economy you are going to spend the next four years dealing with. The good news is that things appear more stable than they did during the deep downturn at the start of 2009 or even at the height of the European crisis last summer. The bad news is that other regions of the world do not seem poised to take over as leaders of global growth.
We can start with Europe, the world’s other bastion of liberal, industrialized democracy — and, in the last couple of years, a giant economic basket case that has sucked away whatever momentum the U.S. economy might have gotten going.
Europe is something of a contradiction now. Its authorities, particularly at the European Central Bank, have finally seemed to act on a scale, and with a resolve, that will prevent an unraveling of the euro zone, a potentially disastrous outcome for the world economy and financial system. One simple measure of market confidence in the European project is the borrowing costs for Spain, which spiked over 7.5 percent (for a 10-year bond) in July. Since the ECB announced in early September a new program to buy bonds, Spanish yields have bounced around between 5.5 percent and a bit over 6 percent, a more manageable level.
Less promising is the situation in Greece, the most financially troubled member of the euro zone. The nation’s parliament is set to vote this week on yet more fiscal austerity in a nation that already has 25 percent unemployment and regular episodes of violence tied to extremist political factions. A two-day general strike is scheduled for this week, and the vote itself is in doubt, and yet another Greek government could fall if the votes aren’t there to approve another painful package of austerity mandated by international lenders. If there is a new wave of the European crisis, it will likely have its roots in Athens.
But for now, markets are persuaded that European leaders will do what it takes to hold their union together, and that confidence reduces the pressures that threaten to rip the continent apart. So there is reason to hope that Europe will, at the least, not be a persistent drag on U.S. growth over the next four years. Now if only it could return to economic growth: Most of the continent is in recession, pulling down global markets and U.S. exporters’ prospects. So, in making your agenda for the next four years, Mr. President/President-elect, just cross your fingers that European leaders don’t backslide in their commitments to each other — and don’t count on Europe becoming a leader of global economic growth.
Elsewhere in the developed world, there are two large, industrialized nations that are strong allies but not poised to emerge as leaders of global growth. Japan has been mired in two decades of flailing economic policy, with terrible demographic problems, unstable government leadership, a massive overhang of public debt and a central bank that is doing everything it can to pump more money into the Japanese economy, to little apparent benefit. Britain, meanwhile, has been stuck in a rut of essentially zero growth since the end of the financial panic in 2009, with fiscal austerity since 2010 a significant part of the reason.
Both Japan and Britain represent examples of what the United States could become, Mr. President/President-elect, if you are unable to guide the United States toward more sustainable long-term fiscal policies timed carefully to not suck the wind out of growth today.
Which brings us to China, the world’s second-largest economy and a remarkable driver of global growth through the economic tumult of the last five years. If the outlook for Europe is murky, here things are positively opaque. A leadership transition is underway that will bring Xi Jinping to power, though even the most knowledgable China analysts don’t know a whole lot more than that: Who will be elevated to senior roles in the new government? What policies might be changed, and where will their be continuity? It is anybody’s guess.
The good news about China is that while its rate of economic growth has slowed over the course of 2012, its economy is nowhere near free fall. In the third quarter, the nation’s gross domestic product rose at a 7.4 percent annual rate, only a slight deceleration from 7.6 percent in the previous quarter, the government said last month. Government economic statistics are unreliable in China, but other evidence points the same direction. An index of activity at Chinese manufacturers by HSBC rose to 49.5 in October, from 47.9 in September, the bank said last week.
There is one piece of good news — from a U.S. perspective — on the China front. It has long been U.S. policy to try to persuade China to intervene less to push the value of its currency down against the dollar, giving an advantage to its domestic industries against international competition. The Chinese government has, in the last two years, been doing exactly that. The renminbi is up 8.5 percent against the dollar since June 2010, when the government began letting its value rise. The adjustment that a generation of U.S. presidents and Treasury secretaries have pushed for is underway, if more slowly than Americans might like.
As murky as the Chinese leadership transition has been, the saving grace for the world economy is that the new leadership has a deep-seated interest in maintaining stable growth in China, and there are lots of policy levers they can use to try to maintain it. The downside is that China has an economy with deep imbalances and a number of possible bubbles that need to be popped without causing much economic damage — and it is new, untested leadership trying to make those decisions.
The rest of the world’s emerging economic powers, which have been a source of global growth during the bad years for the United States and Europe, offer a mixed picture. Brazil’s economic growth has been slowing but appears to finally be perking back up as government stimulus efforts start to have their desired effect. India’s outlook is more hazy: Like China, its growth has been slowing, but unlike China its government is less able to turn on a dime to try to enact policies to keep growth humming.
Democracy can be messy. But after the last few months, you know that well, Mr. President/President-elect.