Forecasting the Economic Climate

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One of the popular questions that the presidential candidates repeatedly ask is “Are we better off today than we were four years ago?” In the Forecasting the Economic Climate session, Leo Abruzzese, global forecasting director for the Economist Intelligence Unit, referenced the same question in his remarks about the U.S. economic outlook, but he also offered some answers.

Four years ago, the United States was at the beginning of the worst six months it had faced in seven years. The economy was shrinking by 4 percent, and it got worse in the first quarter of 2009. In 2012, the United States economy will probably grow by 2 percent this year. By that standard, Abruzzese noted that we are certainly better off, but that 2 percent is “nothing to write home about.” In past years, the economy typically grew by 3 to 4 percent. “The truth is we’re all underperforming right now [the United States, Europe, etc.].”

Abruzzese then turned his focus on offering an outlook on risks and opportunities for next two years. He noted that we are currently in a “dangerous phase.” The global economy is composed of three engines: The United States, which is still the largest economy in world, the European Union, which is about same size as the United States economically, and China. None of those three engines are performing as well as they should, he said. Europe is in a recession, so there is little growth and China isn’t doing as well as usual. China’s economy is growing 7.5 percent, but they are accustomed to growing by 9 to 10 percent.

Four years after the recession, the United States is working on stimulating the economy. The Federal Reserve is turning on the printing press again and printing half a trillion dollars over next year to get the economy going. And it’s not just in the United States; central banks in other countries are trying to stimulate the economy. All this means a couple trillion dollars are going to hit global economy in next 12 to 18 months.

Outlook for 2013

Abruzzese suggested that 2013 most likely won’t be better than 2012 because the financial recession is not a normal business cycle recession and takes years to work through. 2013 will be filled with slow, uneven growth, high unemployment, and less government spending. Additionally, emerging markets will see less export demand. Abruzzese noted that the employment rate has a strong impact on the economy. Seventy percent of what happens in U.S. economy is consumers spending. If they don’t have jobs, they aren’t buying, he explained.

However, in 2014 he suggested the environment will begin to improve.

Looming Fiscal Cliff

The much hyped fiscal cliff is expected to hit in January. Abruzzese says that the worst will not materialize, noting that if it does, it would push us back into a recession. “As dysfunctional as the political system is in United States, whoever controls government won’t let this happen.”

China 2013 Forecast

As noted above, China’s growth has slowed. However, Abruzzese noted they are throwing fuel on the fire to stimulate the economy and beginning to see evidence it’s working. Also in play is the fact that China is becoming more of a consumer, which is good news for every other country interested in selling to them. China has already matched the United States in retail sales.

Growth Snapshot

In 2007, 10 U.S. companies were in the world’s 20 largest companies by market cap. Despite the recession and slow recovery, as of last month, there were 14 U.S. companies on the list. “As long as most of the best companies in the world are still based in the United States, it gives us a reason to be optimistic,” Abruzzese said.