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Divided After All These Years

So far, 2012 has provided further evidence of a divided and disconnected world economy that faces major policy dilemmas. Europe is imploding, the UK is contracting, the US is stagnating and, while Asia is cooling, it at least has the policy tools to be able to rebound.

The global economy has slowed significantly, from a healthy, policy-induced growth rate of 4.2% in 2010 to a much cooler 3.0% growth last year. This year, global growth may be only 2.6%. This masks considerable differences but, as we have seen in recent years, globalisation means no region of the world is completely immune to problems in the West.

The good news is that, helped by policy stimulus, emerging economies, led by China, may see some pick-up into 2013. The trouble is many economies in the West are running out of policy tools to be able to respond with if they are hit by another shock. Hence, it is easy to construct a ‘perfect storm’ scenario for 2013, in which a combination of problems comes together and things get worse.

The biggest shock would be if energy prices were forced higher following a Western-led attack on Iran. This is not inevitable, but the risk cannot be overlooked. It would come as a major blow to global growth as the recent easing in oil prices has helped many economies considerably.