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Deloitte report: Uncertainty characterizes global economic outlook

Analysis of markets in Europe, US, China, India and Japan highlights areas of concern and optimism


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20 February, 2013 - 2012 was, if nothing else, a year of pronounced economic uncertainty for many countries around the world, and for most of them, this trend will linger into 2013, according to the newly released first-quarter edition of Deloitte’s Global Economic Outlook.

Looking at the major global economies, the report analyzes prospects for the year ahead. Its analysis includes the following:

  • In Europe, a fiscal crisis continues to kindle doubt about the survival of the Euro, creating uncertainty that is casting a shadow on real economic performance in 2013.
  • The United States may have already entered recessionary territory.
  • China, India, and Japan are treading uncertain economic waters and scrambling to establish or maintain economic growth.

The nature of uncertainty changes in Europe

The Deloitte Global Economic Outlook begins with an assessment of the Eurozone, where uncertainty remains a recurring theme. However, concerns about the future of the shared currency are giving way to worries about the real economy, which may take their toll on growth prospects in the coming year.

Although risks have not entirely disappeared, the European Central Bank’s announcement of guaranteeing the existence of the euro was a game-changer that built trust among investors. Results of Deloitte Germany’s CFO survey, for example, show that the fundamental doubts about the future of the euro are receding.

Among the top three risk factors the German CFOs cited in the survey, sinking domestic and foreign demand came immediately after the risk of instability in the financial system. The remaining risks stemming from the euro crisis and the growing fears of recession thus create a new uncertainty cocktail.

While uncertainty is a principal ingredient of the business environment, an overdose of it is damaging in macroeconomic as well as microeconomic terms. Uncertainty has become the main drag on economic growth in Europe and elsewhere. The International Monetary Fund (IMF) has found that economic growth is strongly negatively correlated with uncertainty. Recessions associated with uncertainty are generally more severe than normal recessions, and they tend to be deeper and longer. The output losses in such recessions are nearly twice as high as those resulting from other recessions.

The US enters recession

In an article that suggests the United States, like Europe, is already in a recession, author Dr. Carl Steidtmann, chief economist at Deloitte Research, Deloitte Services LP, offers his rationale for a negative GDP forecast that may pull the United States into recessionary territory in early 2013.

According to Dr. Steidtmann, as 2013 begins, the issue of the moment is the next stage in the fiscal policy negotiations, especially the issue of raising the debt ceiling. But regardless of what happens with the fiscal cliff, the United States is already in a recession. The outcome of the remaining budget negotiations will determine whether it will be a mild recession or something more serious.

China appears to be on the mend

The Deloitte report indicates that a more optimistic outlook awaits China whose economic growth is accelerating after slowing down for most of 2012. Improving exports, industrial production, retail sales growth, and declining consumer price inflation suggest that China is, in fact, on the mend. However, the country will need to navigate significant challenges, including ebbing foreign direct investment, a transition in political leadership, and the country’s ongoing need to shift away from export-led growth in favor of its consumer-driven counterpart, all of which raise questions about China’s ability to stay its course.

Japan’s optimism dips

For Japan, 2012 did not end on the optimistic note it had enjoyed one year previously, according to the Deloitte report. In the article titled ‘Back into Recession’, this theme is explored with a look at aspects such as the country’s exports having been hampered by a recession in Europe, declining automobile sales, waning government spending, aggressive monetary policy that hasn’t offset the country’s formidable deflationary pressures, and a high-valued yen that continues to compromise the competitiveness of Japanese exports.

Challenges remain for India

The report ends on a more optimistic note with author Pralhad Burli writing that growth in India may improve over the next two quarters after experiencing a period of deceleration. However, economic challenges, including a burgeoning fiscal deficit, low investments, elevated inflation, and high interest rates are looming over India’s outlook.

Read Deloitte’s Global Economic Outlook for Q1 here.

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