Report Summary
The global economy is at a crossroads. On both sides of the Atlantic, governments have delayed bold fiscal reform in favour of half-solutions. What governments and policymakers do or fail to do over the next few months will have profound consequences on capital markets around the world—and on investment portfolios.
Governments have spent decades avoiding tough fiscal decisions by taking the more politically expedient course of infusing economies with cash. Europeans have agreed to austerity measures in an attempt to face their growing debt issues. But age- old issues of national sovereignty continue to stymie real progress. In the United States, politicians continue to squabble over the role of the federal government in a post-election showdown as the country moves ever-closer to the so-called fiscal cliff.
The continued uncertainty is no help to a global economy already in a prolonged slump. The inability to decide on the best course forward has become a growing drag on the markets. Uncertainty helps explain why the International Monetary Fund (IMF) recently lowered its global economic growth forecasts to 3.3% for the remainder of the year and 3.6% for 2013, down from 3.5% and 3.9%, respectively. The IMF now foresees a one-in-six chance that growth could slow even more, to 2%, in 2013. The Economist Intelligence Unit is even more bearish, forecasting the global economy to expand by 3.4% in 2013. The EIU also cites the uncertainty caused by continued political brinksmanship as being the key drag on global growth—although the growth forecast does assume that political leaders eventually take the necessary steps to avoid economic collapse.
For this report, produced by the Economist Intelligence Unit and sponsored by BNY Mellon, the EIU asked nine prominent economists, institutional investors and financiers what is likely to happen in two scenarios: 1. governments continue on their current course or 2. they make significant progress in dealing with fiscal problems. We also asked what kinds of investment strategies they would recommend in either case. Answers ranged from inaction will inevitably lead to another recession to the very threat of economic collapse will finally prod governments to act. But all agree on one thing: The global economy is likely to face serious challenges in any scenario.
