With the presidential election front and center, developments on the global stage have taken a backseat in much of the press and in the public consciousness. While our attention is focused on the domestic issue of the moment, challenges in Europe, Asia and the Middle East remain. Whether as a result of crushing debt burdens or the uncertain direction of regime change, conditions in many parts of the world are inhospitable to business investment, at least for the present. That carries implications for the U.S. economy and real estate capital markets.
In its most recent World Economic Outlook report, released earlier this month, the International Monetary Fund stressed that threats to global growth remain pervasive. From the vantage point of the IMF leadership, the downside risks to real economic activity seem greater now than in April or last September. The major threats are the European debt crisis and the unresolved fiscal cliff in the United States.
When it comes down to the numbers, the 2012 and 2013 growth forecasts for the United States are relatively unchanged from the IMF’s April report. That is because the baseline forecast assumes some resolution of the fiscal cliff, however temporary and however close to the eleventh hour. Similarly, the general lack of panic in equity markets seems to anticipate a productive lame-duck session of Congress.
Even if we expect our elected officials to surprise us with a last-minute deal that extends the tax cuts for another six months or a year, the potential for shocks to consumer and business conditions are already influencing decision-making. Indications of a fourth-quarter uptick in property sales reflect hedging against the scenario in which an extension is brokered for consumers but not for capital gains.
The United States might shake itself out of the current malaise, but the baseline anticipates that the next couple of years will be tough going. Economic expansion on the order of 2 percent in 2013 suggests limited momentum in hiring. That tempers the improving housing outlook as well, since sustained improvements in demand depend on net new entrants to the housing market rather than just trading among existing homeowners.
In contrast with the relatively benign view of the U.S. outlook, the euro area’s growth projections have been revised sharply downward. Greece and Spain have been joined by Italy in recession. France and Germany barely register expansion and, on a per capita basis, are losing ground. Coupled with a transitioning economy in China and a host of impediments to growth in India, the IMF concludes “risks for a serious global slowdown are alarmingly high.” For everyone Stateside who has grown accustomed to artificially low interest rates, there is no upset on the horizon.
Why have things spiraled so badly in Europe, apart from the inherent limitations of the euro zone’s political apparatus? Among the IMF’s steps out of character, it posits in this latest report that short-term fiscal multipliers may be larger than previously believed. That sounds academic. In lay terms, it means that austerity hurts an economy more than the standard economic model suggests.
Cutbacks by European governments, however necessary, will take a greater toll on near- to medium-term growth. But the flip side may be more pernicious: a higher multiplier in an era of consolidation might also be taken to imply a greater positive impact from fiscal stimulus. That is sure to embolden opponents of austerity, fueling a potentially disastrous spending backlash.
Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.