The Challenges For 2013

G20%20Dec12.pngBy John Richardson

WE wish our readers a great festive season and wish them all the best for the New Year. We will take a break and resume the blog on 28 December.

We really do wish we could be a great deal more optimistic, particularly at this time of year.

2012 has been a difficult year and we worry that next year will be equally, if not more, challenging.

The challenges in 2013 may include:

*Political and social instability in China. There are no guarantees that China’s new leaders will, or even can, get it right.

*Even if the reform process is smooth, China faces what is likely to remain a weak export market, overcapacity across many industries, including even excavators, and the possibility of a US sub-prime style financial sector crisis.

*Spain might well have to default on its debt in 2013. “They’re going to have to ask for help, and they’re going to look for all sorts of things to call the restructuring – something other than the word ‘default,’, but it’s mathematical: they just simply can’t pay for it. They’re going to have to have major reformation. Mariano Rajoy is really in deep trouble because he has no easy solutions,” writes John Mauldin, the economist and financial writer.

* Everything is connected in this globalised world, of course, and hence China will struggle to revive its flagging export trade unless Europe bounces back, but this isn’t going to happen in 2013 as Europe’s problems will likely take at least a decade to fix. Further, Mauldin points out: “One of the things that we don’t think about is how important European banks are to world trade – especially the French banks. They finance a great deal of world trade. They finance a lot of the trade that our country uses when they go internationally. All of these things are connected, and we have to find new ways to do things.” France faces deep economic problems, including a debt-to-GDP ratio of 89.2% and unemployment at 10.2%.

*The US is politically dysfunctional. Sadly, the Presidential election solved nothing. Even if it gets past the fiscal cliff, sensible policies necessary to balance the budget, involving sufficient tax rises and spending cuts, seem unlikely.

Underpinning all of this is demographics. The global economy has lost its suspension.

Demographics drive demand and until or unless policymakers deal with this, we will continue to struggle.

The chart above, from fellow blogger Paul Hodges, looks at the G-20 nations who comprise 79% of the global economy.

The Y axis shows GDP/capita in US$, with the X axis indicating the median age for each country. The blue bubbles are the size of each country’s economy versus the US.

The countries fall into three distinct groups:

*Rich but Old. These wealthy countries have median ages mostly over 40 years.

*Poor but Young. These relatively poorer countries have median ages around 25 years.

*Poor but Ageing. China and Russia are in their own group: China because it has lost 400m babies due to the one child policy; Russia because of its high cigarette and alcohol consumption.

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