Will the world economy end in 2012?

Economists and analysts agree that the economic outlook for the year 2012 really depends on the performance and what happens in three major regions.

1. The emerging markets

2. The US

3. The euro zone

To be quite realistic, the three seem to be heading in divergent directions and with differing velocities. Their prospects for growth are dissimilar and their policies seem irreconcilable with one another.

But some of these divergence may be for obvious reasons; America's market economy is very different from China's socio-economic goals and monetary policies.

Or the difference in economic strategies between Malaysia and that of neighbouring Singapore, albeit the fact that they are both in one trade block, Asean.

But events, both economic and political, in the past year, the euro crisis for example, the S&P downgrade of the US another, or the Arab Spring, have resulted in the gaps widening and with that the chances for political and economic attrition increases exponentially.

Emerging from the shadows

By far the biggest contributor to world growth last year has to be the emerging markets.

From Shanghai to Sao Paulo, these economies have been fluid. All usable capacity has been utilised to the fullest with foreign capital flowing in, where possible.

With the threat of a bubble becoming remote, the real fear now is overheating and inflation. China's economy is a prime example and property prices now are the target of legislative action.

In Brazil, inflation has grown in tandem with the number of shoppers packing malls and is now above 5% with imports up 50%.

The problem seems to be cheap money. Low interest rates, relaxed borrowing rules and loose monetary conditions in efforts directed at holding down currencies.

To keep prices from running away at speeds which will hurt the man on the street, most emerging economies will have to tighten their policies on lending and rates.

The quandary they face is that if they do too little, they are staring at higher inflation and if they do too much, growth and businesses suffer.

However you look at it, emerging markets are looking into the barrel of a macroeconomic blast that is threatening to destabilise on an already wobbly ground.

Owing too much to too many

The obvious nexus of stress is the euro area, financial, micro and macro economically. Short term growth is expected to surely slowdown.

The Greek tragedy has spread to Spain, Portugal and Italy, sending politicians to premature oblivion. Government spending cuts have already sent Greece into a downward social spiral.

In Germany, fiscal consolidation is voluntary with one analyst describing it as "masochistic". Economies on the periphery like Ireland have practically no choices left and are facing a very gloomy outlook.

Nations in a currency block are unlikely to be able to increase their competitive edge too soon by winding down wages and prices.

Cutting wages means cutting prices down but also means hitting businesses hard which need fluidity to keep their shops open.

Too many euro area countries already owe too much to too many. The area's banking model that is based on integration across borders, is disintegrating fast and needs new collateral to keep them afloat and relevant.

The political leaders, many of whom are newbies, untested and are there on a political rebound. face insurmountable problems are threatening to tax their already thin support and political intellect.

Inward looking US with presidential polls

With the US presidential elections due at the end of 2012, the world's biggest economy is expected to shift in different directions.

With microeconomics now the focus and getting money into the average homes, the US policy mix may just move away from austerity.

This may result in US registering an output growth of 4% in 2012, enough to buck the trend and just manage to cut unemployment, but not too fast or even fast enough.

Some see a faster growth on the way but a growing number of investors are worried about the size of the fiscal hole America has to plug. And if these fears take hold, the US bond market could go bust in 2012.

The divergent interest and differing economic goals of the three economic regions will certainly compound the risks and threats in each one.

The US's loose monetary regime concerns for sovereign defaulters in the euro area will encourage capital to flow to emerging economies. This will make it difficult for central banks here to raise interest rates to douse out inflation.

Emerging markets, over the next few years, are expected to account for over 50% of global growth but only 13% of the increase in net global public debt.

East is East and West is West and instead of balancing out, the world economy is headed for a further skewing between the debt ridden West and a thrifty East.

In the past, both the US and Europe worked hand in glove to avoid a depression. But both are now troubled with their own internal economic problems and have divergent views and goals for dealing with their domestic fronts first.

But none of this has to be in 2012.

If the US moves to further reduce the deficit and Europe's cantankerous leaders could thrash out a deal to put the euro area and its financial institutions on a firmer ground, and emerging nations allow their currencies to appreciate, the world might just not end in 2012.

But don't hold your breath just yet. A divided world economy could result in a severe tectonic shift of biblical proportions.

---

DAVID ANANDARAJOO is a veteran journalist.