Happy 2013!? (the yearly predictions)

This time last year I finished off with a post summarizing briefly the predictions on the upcoming year. I was surprised to see that I was right on several predictions. Here's what I've written back then, for the US, UK and Eurozone economies: 

Unemployment is still at high levels and is likely only to rise. Output on the other hand, as well as investments, are likely to fall. Stagnation is upon us.

Ok, so the US has experienced stronger growth (3.1% in Q3) and falling unemployment (7.7 % in November) (even though the employment-population ratio is still stagnant), but the shadow of the fiscal cliff looms over the entire 2013. For Britain and the Eurozone the prediction was spot on - the recession re-emerged in the form of a "double-dip". 2013 doesn't look that good either, even though the US could turn out to be much better if the fiscal cliff is avoided. 

Further more, this part of the previous text summarizes not just the past year, but the entire recession so far:

The picture is gloomy and the politicians are realizing this more quickly than before as their election dates are closer. The current situation of postponing the necessary solutions [reforms] is only pilling up the pressure on them and is increasing the dissatisfaction and antagonism among voters. Sooner or later, we will all have to face the necessary consequences and accept painful solutions. [More bailouts and stimuli] will result only in more debt accumulation and won’t create a favourable environment for private sector growth. It may temporary restore investor confidence but the banks will still be reluctant to lend and the regulatory requirements will still raise costs for private sector enterprises.

An overview of the following year

This time, I'll provide a more detailed look in the future. It's not particularly rewarding to offer predictions (especially in politics) since there is always a risk to make a fool of oneself, but I'll give it a go anyway. 

In Europe, its strongest economy Germany awaits elections and is likely to experience slow growth throughout the year. The chancellor Angela Merkel will be re-elected for another mandate in September, perhaps with new coalition partners, but still strongly in power. It's growth rates will correspond to the Eurozone average of around 0.5%. 

Italy expects elections as well. Mario Monti most likely won't be continuing as Prime Minister, but the possible winner Mr Bresani is likely to continue with Monti's reforms. There's even an option of Monti becoming the President himself thus overlooking the work of the new cabinet. Whatever happens I expect Italy to continue of a stable path out of the crisis and maybe even reach miniscule growth by the end of the year.

It's hard to tell how the Hollande reforms will affect France. With many of the rich fleeing the country following the examples of Gerard Depardieu and Bernard Arnault, it will be interesting to see how effective the 75% top marginal tax rate will be. In addition there might be increased tensions between France and Germany over the remedies to resolve the euro crisis. 

In the UK, the issue of whether or not to stay in the EU is likely to take up the majority of the political debate. The rest will be the economy. More monetary stimuli is expected from the BOE, particularly now with the new governor Mark Carney, who's more open to new, innovative ideas. Even though this might briefly help the UK economy pull itself our of the recession (the expectation is around 0.5% growth), the monetary stimuli solutions will not be enough.   

The rest of Europe (particularly the Eurozone) will be locked down in low growth, still waiting on the proper reforms to kick in (with exceptions like Poland, the Baltics and Sweden). Spain and Greece are still presenting the biggest threat to the survival of the euro, despite the continuous efforts of the FT's man of the year, Mario Draghi to "do whatever it takes to save the euro". This will be enough from the monetary perspective for now, but the reforms must start. In Greece this will be particularly sensitive due the political risk still surrounding that country. The rise of the anti-austerity socialist Syriza party and the radical right wing Golden Dawn will present the biggest obstacle to reforms for PM Samaras. The political risk of early elections will be the biggest drag for Greece, but its euro exit and consequential contagion should be avoided.

Whatever happens, the EU will end up larger in 2013 (EU 28), with one country joining in July: Croatia! 

Nation(s) with the highest growth in 2013: One of the Baltics (Estonia, Latvia or Lithuania). 

Nation with the lowest (negative) growth in 2013: Greece or Portugal. 

USA

As mentioned earlier, the fiscal cliff negotiation (hopefully to be resolved this week) will cast the longest shadow not only over the US economy, but on the world economy as well. The eyes of the world will look upon the US politicians not to repeat the August 2011 scenario which triggered a boiling point in Europe in November 2011. It will be interesting to see how the US will cope with the effects of the wrong type of austerity (higher taxes, and some, if any, spending cuts being the wrong approach). 

The rest of the economy will do fine, providing the effects of the cliff don't kill off the recovery. The housing market is recovering and more savings are finding their way back into the real sector. If proper entitlement, regulation and tax reforms follow, then the economy will grow out strongly than before, despite the austerity pledge. If this part of the deal fails, and the whole deficit bargaining resorts only to higher taxes, postponing everything else, then don't expect much from the US next year. 

The Fed will still support the recovery with "QE infinity" and is likely to keep RGDP growing steadily at around 2%. With a stronger effect of the deficit reduction, it will be expected from the Fed to contribute even more. 

Japan 

The new PM Abe offers new ideas on how to break the Japanese 20-year low-growth deadlock. From the sound of it (a combination of monetary and fiscal stimuli, but avoiding the pension and other structural reforms), it won't happen. Another year of close to 1% growth with a high budget deficit and rising debt is expected. 

BRICs

Brazil's economy is likely to grow more strongly this year (4-5%) providing that President Dilma Rousseff's reform agenda is realized and her fight against corruption and cronyism is successful. Due to the preparation for the World Cup in 2014 and the Olympics two years later, in 2013 Brazil will turn itself into a construction site.

Russia, again (and still) under Putin's leadership is facing more uncertainty in the next decade over the sustainability of its current economic growth model. More protests are likely, but none so strong to endanger his authority. Putin is likely to reverse some of the pro-market reforms done under Medvedev, and turn Russia back on the dependency on energy prices. This won't send Russia into a recession next year, as it will still grow at around 4%, but it is seriously endangering its long-term position.

India is slowing down due to its structural instabilities (like corruption, poverty and lack of skilled labour), even though its industry is still buoyant. It will still grow above 6%, but the trend is now clearly decreasing. Too bad they haven't used the accumulated wealth to reform the country and raise living standards substantially. Next year won't be any different in that perspective.

China will experience a slowdown from its double-digit growth, although with a still impressive 8.5%. Consumption is expected to rise and it will most likely present the strongest component of GDP growth. The new party leadership will continue the previously mapped out policies. It's also interesting to note that more and more Western companies are moving production from China back home (insourcing), primarily due to the increase in Chinese wages and rising transportation costs. This won't hurt China next year, but it will have an effect in the years to come. 

The new reformist President of Mexico promises much and hopes Mexico will soon enough join the BRICs. This won't happen next year, but keep a close eye on Mexico in the following decade.

In the Middle East and the Arab world, prospects don't look good. I expect more turmoil in Egypt with a range of possible political deadlocks. This young democracy is still operating in an old formal and informal institutional system and it will take a few decades to change that. The same goes for all young democracies in the Arab world. It will take some time before they reach stability and prosperity. Hopefully, there won't be another descent into dictatorship for any of these countries. We all know this has happened before (see Acemoglu, Robinson (2006): Origins of Dictatorships and Democracy on the inability to consolidate democracies). In Syria, I expect a Libya-like scenario, with Assad ousted from power by the end of the year. 

All together it will be a turbulent year. I hope no more natural disasters or similar exogenous shocks will happen and slow down the fragile recovery. And it will be slow, particularly in Europe. But perhaps the US will finally "get it together" and be the pull factor the rest of the world (especially Europe) needs. It looks like the final week of this year and the outcome of the fiscal cliff bargaining will determine whether or not 2013 will be a bounce-back or a further descend into the abyss. 

Finally, I wish you all a Merry Christmas and a Happy New 2013!