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Adam Kleinberg

Four Forces Shaping the Global Economy

by Adam Kleinberg

Four Forces Shaping the Global Economy

This morning, I attended the Oxford Economics World Outlook Conference here in San Francisco. The title of the presentation given by the global forecasting consultancy was "Deeper Crisis or Turning Point: What lies ahead for the global economy?"

"What does lie ahead?" you ask with baited breath....

Well, economists are a lot like lawyers I find. They'll help you understand the big issues and risks, but they're not too keen on making clear predictions. Of course, the world isn't a very predictable place. But here's what I heard. 

There are four forces shaping the global economy:

1. Austerity. Governments are spending less—especially in the Eurozone. The scale of cuts are staggering—10% of GDP in Greece, Portugal, Ireland and Spain. Unemployment in Greece and Spain is nearly 25%.

2. Deleveraging. Consider this "Private Sector Austerity." Particularly in the U.S. and Germany, companies and households are shedding their addiction to debt.  Since 2009, there has been a steady downward trend in the amount of loans being held across the board.

3. Cash-Hoarding by Corporations. Companies are holding onto their nickels. They're making huge profits, but not investing them back into growth. The result is that the economy is being prevented from taking off at the speed it should.

4. High Commodity Prices. Emerging economies are, well, emerging. They have needs for the same commodities the rest of the world does. The result? Oil costs twice as much as it did five years ago. And if we go to war with Iran, it could double again leading us into a double dip recession.

There are a number of reasons for optimism in the U.S., however, even if that optimism is muted. Lower dependence on foreign oil, greater financial health for corporations as a result of deleveraging and an increased competitiveness in manufacturing are all factors. 

This last one was very interesting. The costs of manufacturing here have been rock steady for over a decade. By contrast, in Germany, they've increased 30% over that time. In China, 175%. The result is that U.S. manufacturing is more competitive than it's been in 30 years.

The net prediction from Oxford Economics is that growth will increase from 2.4% in 2012 to 2.6% in 2013. Unless those risks become realities.

More sluggish growth ahead folks. Hold onto your hats.

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