Credit Crunch Watch:
US stress levels rose for the second straight week, reflecting higher equity volatility and a slight widening in bond spreads. This is likely to have reflected a combination of a global setback to risk assets following the Italian elections plus some jitters over the ‘sequester’ in the US which threatens sharp government spending cuts. The Italian election results meanwhile produced a political deadlock that saw ‘peripheral’ Eurozone bond spreads widening as investors became concerned that Italy might diverge from the reform process followed by the outgoing technocratic government
1 March 2013
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3 December 2012
The path to fiscal sustainability
The United States is nearing a critical macroeconomic threshold with its debt-to-GDP ratio pushing towards the 90% level usually associated with unsustainable deficits. Debt rating agencies are threatening to downgrade the US unless action is taken soon and, without a clear road map to sustainability, there is a risk that financial markets may lose confidence in government finances. In order to reverse course, the country must decide on a credible scheme of gradual spending cuts, tax increases, or both. But to what extent could US policymakers undertake deficit reduction while delivering strong economic growth and reducing unemployment substantially?
There are both cyclical and structural reasons why the US is now at this point. On the cyclical side, the Lehman Brothers crisis required high levels of government spending to counteract a Great Depression-style event. On the structural side, health care costs and the aging demographic of the country are weighing on its antipoverty programs and safety nets. The number of people aged 65 or older will increase by roughly one-third over the next decade. Costs of health care on a per-person basis will continue to increase without reforms aimed at improving productivity in the medical industry. Over the past 25 years, healthcare spending increased 2% faster than GDP per capita, according to the Congressional Budget Office (CBO).
Read more here: Article
Catalan elections warn of wider social malaise
Regional elections in Catalonia, the wealthiest region of Spain, delivered a majority of seats for parties seeking a referendum on independence. But the main Catalan political party lost seats in the election, meaning that the leadership of the secessionist movement has been weakened. Although they could still try to push ahead with plans for a referendum, the immediate prospect of a constitutional crisis in Spain has dimmed.
The government should now be able to turn its full attention to the financial crisis engulfing Spain. But recent events in Catalonia provide a signal of the broader discontent within Spain at the mounting economic and social costs of the government’s reform efforts. Unemployment has already reached 25% of the workforce and the dire labour market situation is only likely to get worse as we expect the economy to remain in recession throughout next year.
Read more here: Article
Fresh challenges ahead for Latin America
Fresh turmoil hit Argentina this week as legal battles intensified over payments to “holdout” creditors of international debt and it only narrowly avoided the immediate threat of default. This comes in a year that has seen battles with the IMF over economic data, with Spain over the seizure of a subsidiary owned by Repsol, and with holders of foreign currency deposits. Growth has slowed, and is expected to be only 1.7% this year, while the true rate of inflation may be as high as 25%, prompting continued social unrest.
Meanwhile President-elect Enrique Peña Nieto prepares to take the helm in Mexico, where the most pressing issues – apart from the implications of US policies – are how best to achieve further economic reform. And in Brazil the main challenge is how to kick-start the economy again after a year of disappointingly low growth.
Read more here: Article
2 December 2012
Country Economic Forecasts
These concise reports provide regular analysis and forecasts on economic conditions and policy developments in 191 countries. They include downloadable spreadsheets covering 10-year forecasts and 20 years of historical data for key economic indicators.
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