For the past weeks, the outcome of negotiations in the US to avoid the ‘fiscal cliff’ – a term that describes the automatic spending cuts and tax increases set to take place at the beginning of 2013 – has been a major uncertainty hanging over the US economy. Despite recent data showing an improvement in the country’s economy, the lack of clarity about the outcome of these talks over the past months led to a deceleration in business spending and investments at the end of the year, as well as a decline in consumer confidence. Had it been triggered, the fiscal cliff was seen as representing a potential of drag of around 4 percentage points (pp) to US GDP. In the previous MOMR, the forecast growth of 2% for the US in 2013 anticipated a drag of around 1.5 pp. The current agreement – which extends tax cuts for all but high income brackets, continues unemployment benefits for an additional 12 months, and postpones spending cuts for another 2 months – is in line with this assumption, so this year’s growth forecast remains unchanged. If, however, no new solution is found when the postponed spending cuts come due, then an additional hit of around 0.5 pp to GDP will have to be accommodated.
Looking ahead, two further challenges closely related to the fiscal cliff negotiations remain: authorization for 2013 Federal budget spending by 27 March and the raising of the debt ceiling. The debt ceiling would have already been breached at the end of last year had the US Treasury not taken some measures to push this off to allow time for an agreement. This is expected to provide an additional two months. As in 2011 and 2012, it is hoped that lawmakers in Congress will manage to arrive at a compromise. The US is not the only country faced with fiscal challenges. In Japan, the newly-elected government has announced bold fiscal and monetary stimulus actions. Some 10.3 trillion yen in fresh fiscal stimulus spending should provide a boost to economic growth in Japan. This in combination with massive monetary stimulus by the Bank of Japan in connection with an inflation target of 2% is aimed at reviving lasting growth in the economy.
It remains to be seen if these measures will have a profound impact in an economy faced with many structural issues and the highest gross debt ratio of the major economies of about 2.5 times its GDP. The forecast for Japan’s GDP has been raised from 0.6% to 0.7%, although developments will need to be monitored closely to see if a larger rise should be considered. In the Euro-zone, the emergency facilities that were implemented in the previous year by Euro-zone leaders and the European Central Bank seem to have led to reduced government bond yields and have provided a base for growth in the economy for this year, which is forecast to expand by 0.1%. However, with general elections in Italy in February and in Germany later this year, there remains some uncertainty about the near-term future development.
The fragile recovery of the global economy in the second half of last year has already had a positive impact on the growth in exports of emerging economies. In December, India posted a monthly increase of 11.3% and China a rise of 11.0%. This may allow room for new fiscal policy developments in these important emerging economies in the current year. In terms of oil demand, the US is expected to remain flat in 2013 after two consecutive years of declines. US consumption could return to negative territory if the economy were to suffer a setback due to fiscal issues. European consumption is forecast to shrink further in 2013, but at slower rate given the expected improvement in economic growth.
In Japan, oil consumption is projected to remain flat this year due to the strong increase in oil demand last year resulting from high demand for crude for direct burning for electricity generation following the shutdown of Japan’s nuclear facilities. The recent stimulus plan should prevent the country’s oil demand from decreasing. Chinese oil demand in 2013 could be higher-than-expected as exports and investments are picking up. As has been seen, a positive outcome in the countries undergoing fiscal transition could further support global economic growth this year – currently forecast at 3.2% – and thus provide a stimulating factor for global oil demand.
