A Happy New Year?
As we head towards Christmas and the New Year, now is a good time to evaluate which economies are heading for troubling times in 2013. This isn’t so hard, with the world economy not exactly working in top gear, and the likes of even China appearing to slow down. But I have picked three countries that I believe are facing an especially tough and defining 2013.
First up is a struggling EU economy that could define how the rest of Europe solves the Euro crisis. No, it’s not Greece. It’s not even Spain or Italy. The country I believe is in considerable danger is France. One of the leading economies in the euro, its fate has large repercussions on the rest of the European Union. France has a host of problems; High unemployment at over 10% of the population, miserable GDP growth of just 0.1% this year and just 0.8% forecasted in 2013 (which is in itself seen as optimistic) and a budget deficit of 4.5% of GDP that needs to be brought down. Yet already the 2013 budget target of 3% of GDP seems unlikely. But worse than that is the longer running trend of the French economy. France has over the last decades lost competitiveness to countries like Germany, with their products now either upmarket or non-existent. Even their food production is only surviving due to large subsidies from the French government and EU budget. Alongside this the French government is one of the biggest spenders in Europe, spending the highest proportion of its GDP in Europe (57%) and racking up billions of public debt (equivalent to 90% of its GDP). But even these problems could be solved with significant reforms and cost cutting. The fact is however, that the French government doesn’t seem ready for such hardship. President Hollande campaigned on making the rich pay (with his famous 75% top income tax rate), not cutting budgets. While the likes of Italy and Britain employ heavy austerity measures and hard labour reforms to help fix their economies, France seems to be satisfied to keep an inflated government and unproductive economy. For now the nation remains under the radar of the markets, but this could quickly change in 2013, just ask Italy or Spain. President Hollande has only just started a 5 year term, if he doesn’t act now with time on his side, when will he?
Graph found at the Economist: http://www.economist.com/news/special-report/21566238-how-regain-competitiveness-doing-so-so. Shows Frances high public spending and low competitiveness.
Next up on the list is one of the famed BRIC economies that seems to have lost its way. It may seem ridiculous to be picking a country that is set to have grown this year by 5.8% but India are in uncertain times. Inflation has been uncomfortably high for the last few years (currently near 10%) and is hurting the poor population of India. The Indian population relies on high growth of around 6% a year to keep lifting millions out of poverty, so the current slowdown of growth to just under 6% is worrying for the nation. This slowdown has occurred because India’s government is very badly run. It intervenes in the private market far too much, running important industries like the energy sector inefficiently. Corruption is also rife, leading to much of the money meant for those in poverty going into the pockets of local officials. The final nail in the coffin is a complete lack of reform in the last few years, with many markets rigid and inaccessible by foreign firms, leading to poorly run Indian firm producing below average goods and services. India’s growth was started by a series of reforms in the past that lead to greater competition and opportunities for the Indian population. A return to these policies would reignite the economy. But what makes me place India in this list is the complete lack of push for any such policies. Recent movements towards have creating greater competition in the country have lead to large protests and a standstill in the government. Even worse, the election in 2014 isn’t set to change anything, with the opposition just as bad if not worse than the current officials in charge. Change is not wanted, yet is exactly what is needed for the Indian economy to keep progressing forward. Standing still is going backwards.
India has a larger budget deficit and public debt than any other BRIC country in 2012.
Finally, to complete my list, I end with South Africa. For so long the kings of Africa, their dominance is slowly fading. Growth of just 2.4%, high unemployment at 25% and a current account deficit (imports minus exports) of over 6% shows a leading country underperforming. Its crown is challenged by an oil backed Nigeria and a resurgent Egypt, while the smaller nations like Rwanda and Botswana are showing the larger nations how to successfully run an economy. Even its reputation as one of the most sophisticated nations in Africa is losing its shine, as the recent mining strikes show a deep unrest within the country. South Africa remains highly unequal, with a white South African (accounting for only 9% of the population) on average earning eight times more than a black South African. Its Gini coefficient (measuring inequality) has incredibly risen in the last decades from 0.59 to 0.63 (0=Perfect Equality, 1= Perfect Inequality). Education also remains a tragic failure, where the government has somehow managed to outspend every other African country yet still have one of the worst educational systems. Corruption has infested the current government, and with the next general election not till 2014, it seems unlikely anything will change in the next year for the good. Unemployment and poverty remain the big problem (with half the country still under the poverty line), but the problems are all interlinked. A poor educational systems produces unskilled labour, while high inequality keeps millions in poverty. If South Africa doesn’t start investing wisely into education, job creation and equality it is certainly set for a poor future. Don’t look now but South Africa’s crown may be slipping.
Unemployment in South Africa has been incredibly high for the last decade, one of many problems the country faces in 2013.
There were a few more obvious candidates; Greece and the USA. But I decided against them for a few key reasons. Greece are forecasted to suffer another year of serious decline, but the IMF and the EU seem set on keeping Greece running, which in my view could help keep the economy progressing towards a better run state (with them already running a primary surplus). The USA could face a sudden recession with the fiscal cliff, but the problems are clear and I just can’t see America letting themselves go over the figurative cliff (even if that means kicking the can down the road).
The warnings of the fiscal cliff have been clear enough for America to avoid it.
Even with my choices there are signs of progress. In France recently a report on the poor competitiveness of the country seems to have hit home, with President Hollande perhaps realising the true extent of problems he needs to overcome. While a crucial vote was won in the Indian Parliament that will open the retail sector to foreign competition.
Important steps maybe, but more is needed to avoid a year to forget.