STOCK MARKET WATCH -- Wednesday, 19 December 2012

[Demeter]

8. American growth vs. the world: At the top of an underperforming class

http://www.economist.com/blogs/freeexchange/2012/12/american-growth-vs-world

FOR those who started out the year optimists on American growth (such as me), 2012 was sobering. It looks like America will end the year having grown about 2%, according to Deutsche Bank, marginally below the average pace since the recovery began in mid-2009.

Why was it disappointing? In great part part because the rest of the world had an even worse year. Take a look at the nearby table. Of the world's four major developed economies plus China, America was the only country to grow roughly as fast as the International Monetary Fund projected in the fall of 2011. Europe and the U.K. actually contracted, while China (and several other emerging economies) grew notably less briskly.



I draw four lessons from this.

First, America would have had a much better year had the rest of the world performed as expected. This isn't so much through trade, whose contribution to growth has been so far marginally positive, but through the impact on confidence. Complaints that American fiscal and monetary policy are too tight are more true in hindsight than they would have been at the time those policies were being formulated. By kicking the can repeatedly down the road, policy makers have so far managed to avoid tightening fiscal policy.

Second, America's performance next year rides heavily on whether the rest of the world gets its act together. China has emerged from its soft landing but its new leadership seems determined to keep stimulus to a minimum and allow growth to maintain its leislurely (for China) pace of 7.5% to facilitate transition to a more consumer-led economy. Europe's leaders are slowly remaking the region's institutions while Mario Draghi has their back. The threat of a disorderly euro breakup and sovereign default have receded. Whether that is enough to bring the region out of recession remains to be seen.

Third, perhaps the biggest risk in 2013 is that America follows the formula of the U.K. and Europe in 2012. Even if the bulk of its fiscal cliff is avoided, America should count on fiscal tightening in the area of 1.5% to 2% of GDP (and perhaps even 3% if only a partial deal is struck). The mere prospect that policy might tighten that much has been a major dampener on business investment and thus GDP lately. In the face of that austerity it will rely, as Japan, Europe and Britain have, on its central bank pushing quantitative easing even further towards the frontier. Even if you believe the Fed still has some juice left, it's hard to be optimistic about a global policy mix that emphasizes tight fiscal and ever more expansive monetary policy which, as Tom Gallagher of Scowcroft group notes, is not the preferred choice in a deleveraging world with short-term interest rates at zero.

Fourth, beware of forecasts.