A Global Perfect Storm in 2013: Some Directions for the Global Economy

According to many respected commentators like Nouriel Roubini and Joseph Stiglitz, the Global Economy is facing severe headwinds which can culminate in a “Global Perfect Storm” in beginning 2013. The term perfect storm refers to the coming together of extreme weather conditions that culminate to produce a storm of such a magnitude as never seen before.

When applied to the global economy, the term denotes the simultaneous impact of the United States facing a “fiscal cliff”, the Eurozone breaking up and China deleveraging which spells trouble for the economies of the world. Though this has been predicted before, what makes the situation different this time is that the conditions for these events have been set in motion and are accelerating towards a finale.

1. To take the first event, the economy of the United States faces the prospect of a debt ceiling fight over raising the threshold of debt that it needs to take along with the expiration of the tax cuts coupled with the spending cuts coming into play.

   The combination of falling tax revenues, increased debt and cuts to wages and benefits including layoffs of workers in the government sector means that conditions are ripe for a prolonged recession. And when these portend gloomy days for the US, the world economy is bound to be effected since the global economy is heavily dependent on the US for support and sustenance.

2. The second factor that is the Eurozone crisis coming to a head means that the can would not be kicked down the road longer and the moment of truth for the 17 nation Eurozone to decide whether to live together or go their separate ways would arrive by the end of the year.

   The point here is that till now Germany and France have been resisting the breakup of the Eurozone which many say is inevitable. Hence, it remains to be seen how long this situation can persist given the rather humungous debt that the countries of the Eurozone hold.

3. Finally, the Chinese economy that was long thought to be resilient and buffeted against the global economic crisis is deleveraging rapidly along with the loose monetary policy being abandoned because of inflationary pressures.

   Further, the US economy is no longer importing that much from the Chinese and hence, the time for China to consume more domestically and export less is coming into play. This means that stimulus packages aimed at the export sector must now be oriented towards domestic consumption and the excess inventory of goods that have piled up have to be sold off.

In conclusion, these trends are slowly rubbing against each other and the global economy is moving towards a situation where they all impact at the same time leading to conditions that have been described as a perfect storm. Hence, policymakers in all countries including India have to assess the impact of the coming storm and plan accordingly. After all, being forewarned is being forearmed.