Global Economy

Manila Bulletin, January 6, 2013 | Go to article overview

Global Economy


LONDON, United Kingdom (Reuters) - Out with the old, in with the new has a fine New Year's ring to it. Unfortunately, the saying does not apply to the global economy: the uncertainty over US fiscal policy that dominated the last weeks of 2012 is far from going away.

That uncertainty, which is causing businesses to draw in their horns, is likely to be reflected in two important December indicators this week - the Institute for Supply Management's manufacturing survey on Wednesday and the jobs report on Friday.

The ISM index probably rose to 50.2 from 49.5 in November, still well below the second-quarter average of 52.7, while the economy is expected to have added 145,000 non-farm jobs after a gain of 146,000 the month before, according to economists polled by Reuters.

The unemployment rate is likely to have ticked up to 7.8 percent from 7.7 percent. That figure is more important than ever since the Federal Reserve promised to keep monetary policy ultra-loose till it drops to 6.5 percent.

Attention is focused on the immediate consequences of a plunge off the so-called "fiscal cliff" - the combination of tax rises and spending cuts amounting eventually to $600 billion that will be phased in from January 1 in the absence of a deal.

The economy would almost certainly relapse into recession without a solution in the weeks ahead.

Yet economists are also increasingly concerned by the inability of Democrats and Republicans to compromise and what that impasse says about the chances of putting America's public finances on a stable medium-term footing.

"Recent signals from the economy, especially signs of renewed life in the housing market, suggest that a stronger recovery may finally be taking hold. But these encouraging developments could yet be snuffed out by missteps on the fiscal cliff," according to Nathan Sheets, global head of international economics at Citi in New York.

"Similarly, a failure to address the government's longer-term debt-sustainability problems would pose more long-lived risks for the economy - and for the dollar's role as the global reserve currency," he said in a report.

LOGICAL STEPS

After meeting congressional leaders on Friday, President Barack Obama said he was modestly optimistic an eleventh-hour agreement could be found. But neither side appeared to give much ground.

Sheets said it was only a slight overstatement to say that, if entitlement spending is not meaningfully reformed, the federal debt will eventually become unsustainable almost regardless of what else is done. …

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