If executives are looking for a clear sense of where the world economy and global markets are heading -- or more specifically, of what governments may or may not do to lift their economies -- they'll likely be frustrated. That's the conclusion of Gallup's chief economist, Dennis Jacobe, Ph.D., and Sang M. Lee, Ph.D., an expert on Asian markets.
There's a clash of philosophies -- government spending versus saving -- made more volatile by myriad variables, politics, and worldwide economic anxiety.
A big part of the problem is that major governments around the world have conflicting views of how to tackle the ongoing economic crisis. As was revealed at a recent G-20 summit, a gathering of finance ministers and central bank leaders representing 90% of the world's GNP, European leaders are responding to the "great recession" by pushing for aggressive cuts in spending. Great Britain's new prime minister, David Cameron, has called for the greatest austerity program that the United Kingdom has seen in 50 years. German Chancellor Angela Merkel wants to cut $100 billion from the German budget.
U.S. President Barack Obama, on the other hand, has cautioned fellow G-20 members against ending economic stimulus programs too quickly and suggested that more stimulus spending might be necessary if there are signs that the ongoing recovery is losing momentum. Europe, however, is still dealing with the Greek debt crisis, and the region's wealthier countries are concerned about the underlying economic problems in Portugal, Ireland, Italy, Greece, and Spain. Meanwhile, China -- an increasingly important player in global economics -- announced that it would allow the exchange rate on the yuan to begin adjusting to other currencies. China's moves added yet another variable to the complex global economic mix.
So there's a clash of philosophies -- government spending versus saving -- made more volatile by myriad variables, politics, and worldwide economic anxiety. All of this creates a murky and uncertain picture for business and organizational leaders.
Europe's austerity
If the G-20 summit did nothing else, it showed that Europe is clearly on the side of deficit reduction. That's probably a mixed blessing for the United States, says Dr. Jacobe. Europe's resulting slower economic growth will hurt U.S. exports and create a drag on the global economy. More importantly, he says less spending and debt in Europe will stand in sharp contrast to the continued spending in the United States. And once the global economy strengthens again, this could mean higher U.S. interest rates.
"On the other hand, a slower European economy may have the same benefit for the U.S. economy that a substantial tax break might have had," says Jacobe. "I've long thought escalating global commodity prices are the result of excess optimism about the economy in Europe and Asia. Slower economic growth in Europe and Asia might help keep resource and energy prices somewhat in check. It should help with the cost of living, and that should be a positive for the American consumer."
But it's certainly not a blessing for those with money invested in Europe. Last April, Standard & Poor's downgraded Greece's debt to "junk" status. That day, markets dropped worldwide.
"The European Union's financial crisis is an existential threat that EU members will have to address," says Jacobe. "When the euro was created and a European monetary authority was established, there was no similar centralization of European fiscal policy." As a result, the more fiscally responsible countries face the politically difficult task of bailing out the more spendthrift countries that are having trouble paying their debts.
The recent European bank stress tests appear to be a step forward. "My guess is that the tests might have been more beneficial if they had been somewhat more stringent -- far fewer banks failed than expected, and the overall capital need was much lower than anticipated. But just the stress test exercises and the increased visibility they provide shows that Europe stands behind its banks, and that should help build confidence," says Jacobe.
China's currency
While European leaders were wrestling with the looming debt crisis, China's leaders were considering changes to its currency that could also have profound effects on the global economy. Immediately prior to the G-20 summit, China announced that it would allow the exchange rate on the yuan to begin adjusting to other currencies a little more freely over time, a surprise move that immediately -- if temporarily -- buoyed global markets.
Since then, there hasn't been much appreciation in the exchange rate of the yuan, and according to the U.S. Treasury, it remains undervalued against the dollar. "I'd be quite surprised if they dropped the yuan any more than they have," says Dr. Lee, chair of the College of Business Administration Management Department at the University of Nebraska-Lincoln and editor in chief of Service Business: An International Journal. "China holds something like a trillion dollars of U.S. Treasury bills. If Beijing reduced the exchange [rate] by even 20%, those bills would be worth only $800 billion overnight."
Don't expect China to take another look at the issue any time soon either. "The [yuan] exchange rate is not the cause for the international financial crisis, nor is it a barrier for world economic recovery or balanced and sustainable growth," Foreign Ministry spokesman Qin Gang said prior to the summit.
As China becomes more prosperous, wages have increased. Income inequalities between Chinese urban and rural areas have also influenced Beijing's response to wages, says Lee, and will probably drive wages up further. Meanwhile, China is worried about inflation and what looks very much like a real estate bubble in the making, which could further contract its economic growth.
"Doing business in China is getting to be more expensive," Lee says. "So many U.S. companies and those in other developed countries are sending their outsourcing to countries like Vietnam and Cambodia and so on" -- countries that can produce goods and services at a lower price than China.
Doing business in China is getting to be more expensive, so many companies are sending their outsourcing to countries like Vietnam and Cambodia.
Implications for the U.S.
Whether U.S. consumers will start spending money on products, regardless of where they are manufactured, is still an open question. As of early July, the U.S. economy shed a net total of 125,000 jobs, and the unemployment rate dropped to 9.5%.
Some job losses had been expected -- 225,000 Census Bureau jobs ended this summer. But unemployment remains stubbornly high, leaving U.S. consumers reluctant to spend.
"The overall job numbers are not improving much right now, but the situation is actually a lot better than it was a year ago. Companies are laying fewer people off," says Jacobe. "More importantly, while businesses are cautious and selective about hiring, they are hiring -- they are just not hiring a lot."
They're cautious because the economic climate warrants it and because federal policy regarding many of the things that affect business -- taxes, healthcare, and energy, for instance -- are in flux. That kind of "unusually uncertain" economic outlook -- as noted by Federal Reserve Chairman Ben Bernanke in his mid-year testimony before the Senate -- hobbles businesses' enthusiasm for expansion and investment and hinders jobs from being created.
Business can't expect much help from state government either. Twenty-eight states are engaged in wholesale budget cuts, and 22 are furloughing employees without pay. But Washington is unlikely to help out the states. Major legislation rarely comes out four months before elections, and there have been many calls for the U.S. to concentrate on its own debt and deficit worries.
Many economists believe that only increased consumer spending will allay businesses' worry and spur them to hire. If that doesn't happen, and it doesn't appear that it will, Jacobe says the result will be a jobless recovery.
And he expects the lack of private sector hiring to last until early next year -- unless "a miracle," as he calls it, occurs. "We may just slug along on the slow growth path while people and businesses build their balance sheets," Jacobe says. This will make them financially healthier but will inhibit growth.
"The other scenario is that we have a miracle," Jacobe says. "And after the elections, politicians say, 'Two more years of slow and jobless economic growth as predicted by the Fed is just unacceptable both economically and socially,' and they put aside ideology and create a compromise package of tax cuts and spending to create a more buoyant economy." Part of this miracle would be policy decisions that give businesses some security and increased certainty, including a moratorium on changing regulations. "Just a year or two of that would be nice," he says.
Global outlook
All in all, the economic news coming out of Europe, China, and the United States is not as hopeful as it seemed earlier this year. The global economic slowdown seems likely to continue, and there's very little doubt the United States will suffer a slow, modest, and jobless recovery and continuing high rates of underemployment.
But don't give up hope. Jacobe, who isn't known for reckless optimism, thinks that no matter how bad the economic news looks, there's more to it than meets the eye.
"As every day passes, the consumer is getting stronger financially. In May, U.S. consumers shed more than $9 billion in debt. They are deleveraging and repairing their personal balance sheets," says Jacobe. "Businesses are doing likewise. They are continuing to keep expenses and debt low. They are building fortress balance sheets and focusing on organic growth. They are finding new ways to better engage both their customers and their employees. The important thing is that consumers and businesses, by aggressively deleveraging, are building a strong foundation for future economic growth, once the nation returns to a more normal and more manageable degree of uncertainty."