"Never predict anything," said the movie mogul Samuel Goldwyn, "especially the future." Goldwyn's advice is especially pertinent given the high degree of uncertainty we face in the coming year, but let me offer a few observations on which way the wind is blowing.
The U.S. economy is entering the New Year on a strong note with jobless claims declining and consumer confidence rising. Corporate balance sheets are strong and manufacturing is resurgent. Inflation remains muted, monetary policy remains easy, and fiscal policy will avoid significant constraints as Congress extends the payroll tax cut. Fourth quarter GDP could easily be over 3 percent and, given the state of the world economy, the U.S. still looks like the best place to invest in the New Year.
But there are clouds on the horizon that are likely to slow U.S. economic growth to 2 percent for the year as a whole. We must remember that we are still recovering from a deep financial recession. Moreover, there are no strong drivers for economic growth; the consumer will retrench from holiday spending, state government budgets are contracting, business capital spending will remain subpar because of uncertainty about direction from Washington, and export growth will slow as the dollar strengthens and global growth slows.
The biggest problem facing the global economy will be a major credit crunch and recession in Europe. While the actions taken by the ECB to provide short term money to European banks will provide essential liquidity, it does nothing to reduce the sovereign debt crisis emerging in Spain and Italy. You could see this in last week's Italian bond auction which showed Italian bonds remaining highly expensive and reducing the value of the euro to a record low of $1.28. Italy faces a vicious cycle of refinancing over $400 billion in debt when its economy is slipping into recession. The combination of the Italian and Spanish difficulties in refinancing debt will push them into a credit crisis that raises the specter of default.
This is all part of a global slowdown in growth as India, Brazil, South Korea and even China are seeing growth slow from the 2011 pace. India has been particularly hard hit by inflation, tightening credit and an emerging currency crisis. China's growth has slowed enough to cause Beijing to lower its reserve ratio to ease monetary policy.
Unfortunately, there are no signs that either U.S. or European elected officials will take meaningful action to encourage a pro-business, pro-economic growth environment. The best that can be hoped for will be that the 2012 election debate will force the candidates to focus on economic growth and job creation. More consequentially, the worsening crisis in Europe and slowdown in global growth will force central bankers in both Europe and the U.S. to move to a whole new set of quantitative easing measures. This will prevent a global recession but raise the specter of inflation in 2013.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute.