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Factors affecting world economy in 2012

By Li Xiangyang (People's Daily)

10:28, January 13, 2012

Global economic growth slowed sharply in 2011 partly due to the European sovereign debt crisis. Although a global double-dip recession is unlikely, the world economy will face more uncertainties in 2012 as the debt crisis is still spreading in developed countries.

Whether the European debt crisis can be completely resolved depends on the political will for European integration. The recent changes of governments in Greece and Italy as well as the European Union’s breakthrough in fiscal integration have shown their will to resolve the crisis. Only with a strong political will can the European Union completely resolve the debt crisis and eliminate the possibility of a euro area break-up.

The United States has a better economic outlook than Europe. The U.S. government is reasonably confident about solving its debt problems, and the U.S. property market has shown signs of bottoming out. In addition, the Japanese economy will grow faster this year due to post-disaster reconstruction.

Emerging economies will continue to maintain relatively rapid growth and drive global economic growth. However, due to the weak economic growth in developed countries, emerging economies face a difficult dilemma between economic growth and inflation.

Since the global financial crisis, emerging economies have been leading world recovery through massive government intervention, and have suffered heavily from inflation and overheating. Due to the sovereign debt crisis plaguing developed countries, emerging economies have to loosen their economic policy again before bringing inflation under complete control. The overheated domestic economy and sluggish external demand have put emerging economies in a dilemma between maintaining rapid growth and controlling inflation.

International capital flows may reverse and return from emerging economies to developed countries. In the second half of 2011, international capitals started flowing from emerging economies to developed countries, especially the United States. On the one hand, this backflow probably reflects the hedging character of international capitals. On the other hand, two middle and long-term factors should be noticed.

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（Editor：张洪宇）

Leave your comment3 comments

Heinz Stiller at 2012-01-18188.60.9.*: By and large, I share the views of the author. But I cannot see how the US is going to tackle their debt problem, particularly in election times. Everybody talks about the European debt crisis. But look at the US! During the last few years, when Italy"s yearly new debt grew by a modest 6 or 7% all in all (just for an example), US debt skyrocketed by 50%! While Italy"s budget deficit will be around 3% in 2012/2013, the US deficit is at roughly 10%. Investors" perceptions of reality are becoming increasingly bizarre, gracing one of the main debt culprits of the world by extremely low bond yields. But, as the Americans say, you can"t fool all the people all the time. Despite the gigantic propaganda machine of the Angloamerican finance media, investors will, in the end, look at the objective facts. They will realize that the US, although with very low taxes, will not raise more money to pay back their bonds. They will just print this money. And hope that that investors will accept or ignore the unavoidable fact that this policy will lead to "dis-enrichment" of bond-holders.
Feriel at 2012-01-15174.95.102.*: Emergering economies must learn to trade with each other and avoid trading wtih the developed world until the shape up there financial situation. People is power and energy and developing countries have both.
Luis de Agustin at 2012-01-1468.36.168.*: According to David Ranson, head of research for Wainwright Economics, current economic policy in the US and euro zone is scaring private capital away, and that’s the main source of current poor performance. His diagnosis rests on two ubiquitous themes in classical economics: if private capital is not willing and able to invest in an economy, the economy cannot grow; and, that private capital shuns economies where the public sector is expanding or is intrusive and unpredictable. Wainwright clearly sees that the policies of the European leaders to put what they call a “firewall” around their debt crisis are failing. However, the outlook for the world economy as a whole is not much affected by the continuing meltdown in the euro zone. That’s because the US and the emerging world can recapture most of the capital that is flowing out of Europe. In the US, there are scattered signs of improvement that suggests this might already have started. Luis de Agustin