Our Opinion On: The Economy in 2013

Looking back on 2012 in an economic sense presents a very mixed picture. Most of the developed world hasn’t had a brilliant year, but it certainly hasn’t been as bad as it could have been considering events that took place or the past few years. The UK certainly didn’t do that well, moving back into recession and future forecasts being lowered. Similarly, the Eurozone also had a bad year, with the situation worsening but marginally avoiding outright chaos. Meanwhile, the picture was only slightly better in the US, with growth but certainly not reaching potential. If it wasn’t for the Olympics it might have been a year to forget and when looking ahead to 2013 it’s easy to see how it will be another unremarkable year.

In 2012 the UK experienced a double dip recession, ever since then the economy has been crawling out of the hole, but probably not enough to avoid a contraction overall. Although the Olympics helped the economy to achieve growth in Q3, global hazards, such as the Eurozone and the US Fiscal Cliff have really held back any potential growth. Even though this likely will continue into 2013, I believe that the prospects are looking better in the year ahead. Throughout 2012 the economy continued to add jobs despite any stagnation, hopefully leading to a boost in consumer spending, with less tax rises in the year ahead when compared to previous years. It’s possible that households will continue to pay down debt, but with consumers hopefully seeing incomes grow this year, some of that will be spent. In addition, with the worst of the Fiscal Cliff avoided and the domestic picture improving, businesses should also start spending some of their cash, investing in new machinery or buildings. All of this combines into the Economist Intelligence Unit, the most accurate forecasters for 2012, expecting growth to be around 0.5%, which although isn’t brilliant, is much better than the past few years and importantly, should mean that the country avoids a triple-dip recession. Expectations are so low that it’s possible that the economy could provide a nice surprise, but I still expect it to be a pretty unremarkable and forgettable year for the UK.

In terms of public finance, Osborne’s Autumn Statement presented a pretty bleak picture and it’s likely that this will continue into 2013. As they have threatened over the past couple of months, at least one of the main credit-rating agencies will likely strip the UK of its cherished Triple-A credit-rating. This likely won’t change anything economically, with the US actually seeing a reduction in bond prices after their rating drop, but politically it could represent a problem for Osborne, who has claimed that maintaining the Triple-A rating was one of this main objectives. However, as long as everything continues as normal and the economy sees a return to growth, most people won’t mind.

Across the pond in the US, the picture has been better, with growth averaging just over 2% in recent years. However, held back by falling home prices, tight credit and government cut-backs, it is still lower than many would have hoped. The picture will be much of the same for 2013, with the lower dollar helping to push exports, combined with the resurgence of oil and the shale gas boom. Households should start to feel like there is a return to growth in 2013, having paid down a lot of their debt and with signs that the housing market is starting to recover. There is also the possibility that businesses will provide a boost to the economy, waiting for news on the Fiscal Cliff, with massive cash piles that are ready for investing just as in the UK. As always, there is no guarantee that any of this will be spent, but if investment does start increasing as many have predicted, this will be a further boost to the economy.

Although the Fiscal Cliff, a combination of expiring tax cuts and automatic spending cuts that would have pushed the economy back into recession has been avoided, the country will now need to focusing on raising the debt ceiling, which will be hit in February. Just as with the Fiscal Cliff and the last time the ceiling had to be raised, negotiations will be tough. Republicans will want to see spending cuts, just as with Paul Ryan’s plans, while the democrats will want to see existing plans continued for at least the next year. Both parties will need to find a middle ground, but this is harder said than done. Democrats will likely be angry at the House’s procrastination, while the Republicans will be annoyed at how Obama handled the Fiscal Cliff. Reports suggested that he constantly suggested a new plan, with little concessions, before removing it and retreating to a worse deal. It’s likely that once again, as with the Cliff and Weapons Bans, Joe Biden will be seen to lead negotiations for the President. A deal will have to be brokered, with the consequences unthinkable, but the path won’t be smooth and will most likely lead to another downgrade of the countries credit-rating.

The Eurozone was the source of most of the problems for the worldwide economy in 2012, with Greece having the potential to bring down the currency and domestic unrest increasing. However, the problems in Greece seem to be mostly sorted, with the European Central Bank promising to purchase an unlimited amount of bonds, calming the markets. Attention in 2013 will turn to Spain, with Europe’s fourth-largest economy having the potential to cause serious issues. It is expected to borrow 20% of GDP this year, before you even start to consider the cost of shoring up the countries banks. Systems put in place such as the European Stability Mechanism and the ECB should keep the country out of any major problems, but as we’ve seen before, nothing can be taken for granted. Capital flight will continue and with no source of potential growth, things will only get worse in 2013 for Spain, with the challenge ensuring that this doesn’t spread to the rest of the Eurozone.

However, just like a chronic illness, the problems will be neither strong enough to kill the patient nor weak enough to be easily cured, so it’s another year of just hanging on. A full cure would need a banking and fiscal union, which for political reasons is unlikely to happen in the short-term. Most importantly though, the German election at the end of the year could be key. I expect her to win, but the election means that Europe will continue as it has in 2012, with no real long-term prospects. One thing’s for certain, the Eurozone will probably survive this year, with banks predicting that Greece will stay in the Euro this year, possibly leaving in 2014 after the German election.

In terms of global trends, we’ll see the continuing bifurcation in the main economies, as the rich get richer and the poor getting poorer, while the middle get ever more squeezed. This means there will be a continuing debate over taxing the rich and benefits for the poor, which could actually do more harm than good, as seen in France. In addition, we’ll see arguments over the size of governments, particularly in the US but also in the UK.

Yet again another mixed picture for the world economy. Everything will likely continue as it has in 2012, with marginal improvements in the US and the UK. The Eurozone will falter yet again as Germany struggles with a possible rise in unemployment and a potential recession.  China will struggle as cracks begin to appear to those who look, as although the country experienced 8.6% growth recently, 6 percentage points of this came from a rise in government investment which cannot continue forever. Just as in 2012 though, the US will lead the developed world, with the UK rising out of recession as it turns more to the Commonwealth and emerging markets instead of the EU.

However, it’s important to note that while we can make predictions, 2012 has taught us yet again that nothing can be taken for granted. Even the things that seemed quite straightforward might not happen or could change at the last moment. Last year, in their predictions for 2012 many people thought that George Osborne would either maintain the 50% tax rate or drop it altogether, but instead he took the middle ground, announcing a 45% tax rate in the budget. It’s also likely that just as in 2012, with the LIBOR scandal, we’ll get some events that will change everything. Although it’s likely that 2013 will bring better news for the world economy, it’s very important to keep an open mind. The biggest story of 2013 is likely to be something that we never even saw coming.