The start of a new year is a good time to take stock. For those of us in the news business, this suggests stepping back and asking what’s important. Here are five economic stories worth watching.
1) What happens to oil? Saudi Arabia has helped drive down crude prices from roughly $100 a barrel to about $60 by refusing to cut its production in the face of a global surplus and the unwillingness of other producers to cut their output. The question is whether the Saudis will hold to this strategy until enough high-cost producers — including some U.S. shale oil operators — are driven from the market or whether they’re seeking some sort of production-sharing agreement with major exporters inside and outside the Organization of the Petroleum Exporting Countries. What’s clear is that Saudi Arabia doesn’t want to cut output unilaterally.
2) What happens to Europe? A year ago, the worst of Europe’s currency and debt crisis seemed to have passed. Well, maybe not. Greece is now headed for a parliamentary election on Jan. 25, with the possibility that the left-wing Syriza party — committed to ending the austerity policies of the ruling center-right New Democracy Party — might triumph. If Syriza wins and repudiates some debts, there might be spillover to other debtor countries, including Portugal and Spain. Rising interest rates would make it harder for them to service their debts. The crisis could spread.
3) Will the Fed get it right? Since late 2008, the Federal Reserve has held its benchmark short-term interest rate — the Fed funds rate — at near zero. With the economy strengthening and unemployment dropping below 6 percent, pressure is building to raise rates to more normal levels. For the Fed, this creates practical problems: It doesn’t want to raise rates too rapidly for fear of disrupting the recovery. But even if the Fed proceeds cautiously, it could be frustrated by private investors. What matters most are long-term rates on home mortgages and corporate bonds — rates largely outside the Fed’s control. If private investors react by raising these rates, the recovery could suffer.
4) Will wages begin to outperform prices? For most of this recovery, wages have generally stayed even with prices, increasing at about a 2 percent annual rate. As a result, many workers haven’t received inflation-adjusted increases in wages or salaries for years. Now this could reverse. As labor markets tighten, employers may have to pay more to keep their best or most experienced workers. Meanwhile, lower oil prices may — at least temporarily — cut inflation. Together, these forces could produce modest increases in inflation-adjusted wages. This could bolster consumer spending and confidence, strengthening the recovery.
5) Can China maintain strong economic growth? For years, growth rates averaged close to 10 percent, powered by massive industrial and infrastructure investments and huge trade surpluses. But this was not sustainable, and relying more on consumer spending has caused China to lower its growth target to 7.5 percent. Even this may be too ambitious. Since the global financial crisis, China’s debt levels have exploded as loans were dispensed liberally to avoid a slump. Now, China can no longer depend so heavily on borrowed money. A slowdown could have wide ramifications. Commodity-producing countries could suffer because China is generally their largest customer. If China stimulates exports by allowing its currency to depreciate, trade wars might intensify.
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