The year of self-induced stagnation
The West’s economy will falter, for largely avoidable reasons, says Zanny Minton Beddoes
Nov 17th 2011 | from The World In 2012 print edition
When tomorrow’s historians write about the Great Stagnation that blighted the rich world’s economies in the early 21st century, 2012 is in danger of standing out as a depressing turning-point. It could be the year in which a weak recovery is walloped by avoidable policy errors—mistakes that send economies from Italy to Britain back into recession.
There will be parallels with 1937, when a wrong-headed tightening of fiscal and monetary policy dragged down America’s economy and extended the pain of the Depression. The details are different, but in 2012, too, avoidable errors will ensure that the Great Stagnation lasts far longer than it needs to.
The first, and biggest, of these errors will be Europe’s mishandling of the euro crisis. Despite the obvious failure of Europe’s “muddling through” strategy, there will be more of the same. The holes in the latest rescue plan, hammered out in October, will become ever more obvious in 2012, even if it survives political wobbles in Greece. In each of the three big areas where European politicians claim they acted boldly—creating a financial firewall to convince investors that solvent but illiquid economies such as Italy and Spain will not be forced to default, recapitalising banks and dealing once and for all with Greece’s unpayable debts—the plans will prove to be a timid middle course. Just enough will be done to fend off financial catastrophe; not enough to solve the underlying problems.
Under its new Italian president, Mario Draghi, the European Central Bank (ECB) will remain reluctant to be the lender of last resort to illiquid governments. Nor will Europe’s creditor governments add to the region’s rescue funds or introduce Eurobonds backed by the might of the euro area as a whole. Instead the firewall will be pieced together with a complicated mix of guarantees, special-purpose vehicles and creative borrowing. Europe’s main rescue fund, the European Financial Stability Facility, will issue partial guarantees for new sovereign debt. It will provide seed capital for new financial structures into which Europe hopes to tempt sovereign-wealth funds and private investors—hopes that will prove quixotic.
The complexity of a jerry-rigged firewall will undermine its effectiveness. A similar story will play out in Europe’s efforts to bolster its banks. Banks will be forced to increase their risk-weighted capital ratios by the middle of 2012. But they may do so by shrinking their assets, thus constricting credit and exacerbating the squeeze on Europe’s economies. And without a steely European bank regulator or a single finance minister to oversee the process, fears about banks’ health will not go away.
The fragility of Europe’s defences means the big debt write-down that Greece needs will be both less effective and unnecessarily dangerous. Greece’s private creditors will see a “voluntary” restructuring in 2012, with the nominal value of the debt reduced by 50%. That will be a big step forward, but still not enough to restore the country to solvency. Contortions to keep the debt deal “voluntary” (and so avoid triggering credit-default swaps) will do lasting damage to that market.
Avoidably austere
Just as in 2011, the uncertainty created by this muddle-through approach will weigh heavily on financial markets. The economic damage from it will become more evident, particularly as embattled banks curtail their lending. Worse, this uncertainty will be compounded by the second avoidable error of 2012: an excessive embrace of short-term budgetary austerity.
Most rich countries will begin 2012 feebly, with GDP growth well below its trend rate. Yet virtually all plan to step up the pace of austerity. As a group, the big economies of the rich world will see budget cuts worth more than 1% of GDP in 2012, twice as much as in 2011 and one of the biggest collective tightenings on record.
The rich world will see one of the biggest collective tightenings on record
Some countries, particularly the embattled economies on the periphery
of the euro zone, have no choice. They have lost the confidence of
financial markets and are being pushed by their rescuers to slash
deficits. Britain’s government refuses to adjust its course for fear of
losing markets’ confidence. Policymakers in Germany and the Netherlands
are fiscal hawks by faith, believing austerity is the only appropriate
remedy for the rich world’s ills. In America the tightening will come by
default, as Republicans in Congress refuse to pass Barack Obama’s
latest stimulus plan and as temporary tax cuts expire.This fiscal contraction will weigh heavily on the rich world’s growth. Fortunately, central banks—in contrast to 1937—will try to counter, rather than compound, the problem. The ecb will cut short-term interest rates close to zero; the Bank of England will add to the quantitative easing (QE) it restarted in October 2011; America’s Federal Reserve will also do more QE and may set an explicit target for long-term interest rates. Such monetary easing will prevent a severe downturn, but it will not stop the recovery from stalling. Some countries will be pushed back into recession: certainly Italy, probably Britain, possibly America.
That pain would be worth enduring if it led to a better medium-term budget outcome. Unfortunately, in far too many places it won’t. In some cases that is because of another set of budget mistakes. In America, for instance, political gridlock will prevent any progress in dealing with the country’s medium-term deficit problem, even as it enshrines short-term tightening. Elsewhere, such as in Europe’s periphery, the scale of budget tightening will cause such economic damage that the countries’ debt outlook will darken rather than brighten. Instead of a virtuous cycle where fiscal austerity leads to greater confidence and better prospects, the opposite dynamic will take hold.
Might booming emerging markets help? Not as much as you might think. China’s own growth is slowing, as it must if inflation is to be checked. And with less room now to respond with another spending binge, China and other emerging economies will be more vulnerable to damage from a new downturn in the West.
How grim 2012 becomes will depend on how far, and for how long, politicians persist with their misguided policies. In many countries the election cycle bodes ill. America is unlikely to see big political compromises in a presidential-election year. On both sides of the Atlantic a deep recession or a serious financial crash would probably induce bolder solutions. But the most likely outcome is an economy not quite weak enough and a crisis not quite large enough to galvanise spineless politicians. That’s why 2012 will be the year of self-induced stagnation.
Zanny Minton Beddoes: economics editor, The Economist
Great Recession v Great Depression of 1930s
We have frequently heard the statement that we are experiencing the worst recession since the 1930s, but data released from the ONS shows that the fall in GDP is actually more prolonged in the current 2008-12 recession than the Great Depression of the 1930s.
source: Office of National Statistics (pdf):
In terms of human misery the Great
Depression of the 1930s was far greater. Unemployment in the 1930swas
higher and in the absence of a proper social security net, those who
were unemployed faced living on the breadline with only a very meagre
unemployment allowances.
But, this graph does show that the extent and prolonged nature of the current fall in GDP in the UK.
Statistics from the ONS show that the
biggest cause of the continued recession is not the Eurozone crisis, but
the fall in construction and mining sector. Government spending cuts
are a key factor in causing the fall in construction. For example, the
halting of the school building programme. Unfortunately, when
governments pursue austerity measures, it is often capital spending
which is the easiest to cut – delay road building, delay building
schools. Yet, this is the kind of spending which is the most important
for economic recovery.
One thing is certain – the government’s
claim that spending cuts would provide a boost to economic confidence
have proved unfounded.
Exports have been weak. Though the biggest
fall in UK exports has been in our trade with the US. Exports to US fell
£0.5billion causing most of the fall in exports to non-EU countries.
There has been a steady decline in exports
to the EU since Oct 2011. This fall in exports to the EU may have
contributed to decline in construction. But, this is only a relatively
minor figure. It is more significant that we have seen a 25% decrease
in public sector net investment since last year.
By Bob Reiss
What's important to the success of small-business owners and entrepreneurs? Knowledge, skill and talent.
However, many competitors have the same traits you do. The key to
beating the competition and achieving success is mental, reflected in
one's attitude, totally controlled by the individual and requires no
cash. This holds true in most human endeavors besides business — in
sports, the arts and politics. How many times have we seen the underdog team or player win over the more talented opponent? The difference is often attitude.
These 12 attitude attributes can put you in the right mindset for achieving entrepreneurial success.
1. Have passion for your business Work should be fun. Your passion will help you overcome difficult moments and persuade people to work for you and want to do business with you. Passion can't be taught. When it wanes, as it surely will in difficult times, take some quiet time. Whether it be an hour or a week, take inventory of all the reasons you started the business and why you like being your own boss. That should renew your passion.
2. Set an example of trustworthiness People have confidence in trustworthy individuals and want to work for them in a culture of integrity. The same is true for customers.
3. Be flexible, except with core values It's a given that your plans and strategies will change as time goes on. This flexibility for rapid change is an inherent advantage of small over large business. However, no matter the pressure for immediate profits, do not compromise on core values.
4. Don't let fear of failure hold you back Failure is an opportunity to learn. All things being equal, venture capitalists would rather invest money in an individual who tried and failed founding a company than in someone who never tried.
5. Make timely decisions
It's okay to use your intuition. Planning and thought are good. But procrastination leads to missed opportunity.
6. The major company asset is you Take care of yourself. Your health is more valuable than the most expensive machinery or computer software for the company. You don't have to choose between your family or your company, play or work. Maintain your health for balance and energy, which will, in turn, enhance your mental outlook.
7. Keep your ego under control Don't take profits and spend them on expensive toys to impress others. Build a war chest for unexpected needs or opportunities. This also means hearing out new ideas and suggestions no matter how crazy they sound.
8. Believe
You need to believe in yourself, in your company, and that you will be successful. This confidence is contagious with your employees, customers, stakeholders, suppliers and everyone you deal with.
9. Encourage and accept criticism graciously. Admit your mistakes. You need to constantly work on convincing your employees that it's OK — even necessary —to state their honest opinions even it if conflicts with the boss's opinion. Just stating it once or putting it in a mission statement won't cut it for most people.
10. Maintain a strong work ethic Your employees will follow your lead. It will also help you beat your competition by outworking them, particularly when your product or service is very similar.
11. Rebound quickly from setbacks There surely will be plenty of ups and downs as you build the business. Learn from the setbacks and move on. You can't change the past.
12. Periodically get out of your comfort zone to pursue something important Many times you will feel uncomfortable in implementing a needed change in technology, people, mission, competing, etc. For the company and you to grow personally, you sometimes have to step out of your comfort zone.
Many organizational and leadership shortcomings can be overcome or mitigated with the good attitudes described above. All can be learned except passion, which comes from within. Take time out of your hectic schedule to periodically reflect on these attributes. You may be inspired to act.
Bob Reiss is the author of "Bootstrapping 101."
Copyright © 2012 Entrepreneur.com, Inc.
No comments:
Post a Comment