2012 has been a rollercoaster ride and the cards dealt for 2013 promise that the excitement will continue. But what will really be the important factors to look out for in 2013?
Here are five factors that have the potential to make or break the world economy next year.
It’s not what you don’t know, but what you do not know that you don’t know, that gets you in the end. This is a sobering observation for a world economy walking the tightrope on its way to restoring growth. In the precarious balancing act that most major economies find themselves in these days, big surprises are the last thing they want. It does not take much to change the mood in the markets today so a surprise event could turn modest growth into recession. A bank failure, social unrest, an unraveling political situation, something we do not expect nor can properly foresee, could be critical at this point in the recovery. Growth is dependent on the willingness to invest and consume, and inherently rests on trust. Trust that tomorrow will be better than today, that we have a job and money to spend, that our business partners can settle their bills. A surprise event could quickly destroy that trust and change the growth prospects overnight.
2. Budget cuts
Governments in many developed economies have come out of the recession in a worse financial state than when they entered it. This has partly to do with the financial burdens they had to shoulder in order to get through the crisis. But there is also a more fundamental side to it, where it is becoming increasingly apparent that many societies have been living beyond their means funded by available and cheap credit. This is now changing and governments must adapt. The process already started in 2012, but will mark much of 2013 as well, as budgets are tightened across the western hemisphere. It is a central tenet in the political divide in the US and often marks demarcation lines between republicans and democrats. Thus the outcome of the “fiscal cliff” debacle in the US will be critical for the country’s future growth. The Eurozone has been cutting budgets for the past couple of years, but will still need to adapt its spending to actual earnings. The most difficult balance is to strike the right mix between reducing budgets and stimulating growth. The economies that come out of 2013 in the best shape will most likely be those who got this balance right.
3. Political polarisation
Rebalancing spending and earnings is painful, unpopular and difficult as it implies reducing the public services offered, increasing taxes and decreasing standards of living. In Europe we already see how this fosters political polarisation, social unrest and a much more difficult economic climate. This trend is not easily changed and will be an important factor to watch out for in 2013. Both, Germany and Italy will hold elections and the outcome of these will be important telltales for what political winds blow in Europe.
It is in turbulent times that the foundation for tomorrow’s success is laid. We should expect to see changes in industry as well. The automotive industry, for instance, is in a challenging situation, particularly in Europe with overcapacity and low profitability. There is a fair chance that we will see consolidations and changes, particularly amongst the smaller players in the near future. We will also see that the crisis drives the focus to other geographical areas, with trade patterns changing to reflect a rebalanced world economy where Asia plays a much larger role than before.
Still, if we look into the crystal ball, it’s not all doom and gloom. Growth has begun in some of the world’s major economies. We see investment activity starting to pick up and some of the long-term indicators shifting to more positive readings. Given that we do not get a major surprise, that budgets are not cut to the point of stifling the economy, that political polarisation does not hamper politicians’ decision-making ability and that the world’s major industries are able to take the necessary steps to tackle inefficiencies and improve their long-term structure, there is a fair chance that growth will continue in 2013.