Forecastonomics 101 (Or What is In Store for 2013)

Another year is coming to an end and as we do every time  this happens (which is roughly once a year) many of us are trying to look around the corner to take a peek at what is ahead. Economics, is of course, no exception; after four years of the greatest economic crisis in over eighty years we're all about ready to turn the page, hoping that 2013 will bring better times for all. Will this be the year where the United States will recover and drive global growth once more? Will China continue growing at high rates or will it crash and burn among the bursting of a real estate bubble, bad loans and rising pollution? Will Argentina sink again into economic and social crisis? And more importantly: will Angie Merkel and Frankie Hollande consummate their fiery passion for each other and save the European family?

As with all serious economic forecasts, mine is based on the scientific reading of  my morning coffee and the stains of last night's Mongolian beef on myr rice bowl - thus if by the end of 2013 my predictions turned out to be wrong, that is probably because the Indian cook at the Chinese place in the Irishest part of Boston was off his game. Not me (remember, economists are never wrong).

So here are my little predictions for the economies I follow.

Argentina

The prognosis for the Argentine economy is grim. The so called 'model' built on subsidized consumption and an artificial trade surplus is spent: the government is out of cash, inflation is rampant, investment is fleeing the country and unemployment is probably rising far faster than the government-doctored figures will admit. The structural imbalances have become so great that it will take years to rectify the economy.

1. Argentina should still have enough funds to make good on its upcoming obligations in 2013 so I do not see a repeat of the 2001 national default. However, the possibility is still there and it is possible for some of the provincial governments to default.
2. The imbalances in the energy sector are unlikely to be corrected in the short term, this will lead to generalized power outages and thus a reduction in production, investment, GDP growth and contribute to an increase in unemployment
3. Unless the forex restrictions currently in place are lifted or eased, the construction industry will grind to a stand-still next year causing a substantial spike in unemployment.
4. Argentine banks will continue to see high-levels of capital flight. Given the Argentinean psyche, it is very likely that we will see a bank run in the event of a deep recession. This continual flight of capital is leaving local banks ill-prepared in this eventuality.
5. Inflation will remain above 25% 
6. Argentina still relies heavily on the income generated by its exports of soy beans and derivatives. Any further downward fluctuation of the price of this commodity could send the economy reeling (at the same time, a currently unlikely increase in price could be the Government K's only path to salvation)  
7. In the best case scenario, I believe Argentina would grow only at about 0.5%-1%. I am however highly skeptical of this and believe that it is far more likely to enter into a deep recession with negative growth of -2% to -4%. 
8. The official INDEC-approved unemployment number is likely to reach 10% of  the EAP. My estimate is that the real unofficial unemployment rate will be of about 14% by year-end.

China

There is now a fairly wide consensus about China's need to re-balance its economy from an export oriented machine to one based on domestic consumption. This transition would likely imply the need to enact politically costly decisions and tolerate far slower growth rates than the ones set forth in five year plan (7%) - with a brand new leadership taking the helm of the country next year, this is unlikely to happen.

1. The government will stimulate the economy to achieve its target growth rate by pumping money into it, promoting key infrastructure projects and cheap credit for companies
2. The toxic combination of cheap credit, SOE and state pressure to expand to maintain its high-speed growth will likely lead to an increase in corporate debt. According to a study by Dragonomics combined corporate and public debt amounts to close to 206% of GDP. I believe that given the situation corporate debt is likely to expand by 15% to 20% in 2012 alone (the majority of which would be in the form of non-performing loans).
3. The same will likely hold true for the national debt, yet the PRC's opaque numbers makes it very difficult to accurately estimate the true size of Beijing's obligations.
4. There won't be a real-estate cash (yet). Throughout 2012 the Chinese government took a series of steps to cool down the rapidly inflating bubble. However, considering the impact that housing has on the overall economy I believe the government will need to release some of the restrictions currently in place to stimulate the economy and achieve its target growth.
5. Thus I do not believe that we will see a sharp deceleration of the Chinese economy; I think it is likely that GDP will grow 7% in 2013. However, this will only contribute to exacerbate the imbalances within the economy, and China could wake up with a nasty hangover as early as mid 2014.

Europe

Who knows really? I do not believe that European leaders themselves have any idea what to do with their own countries, let alone with the Union. The only thing I am pretty certain about is that the EU will see very little (if any growth) and a continued transfer of money from the core to the periphery. We are unlikely to see solid growth coming from the Eurozone unless there is i) unequivocal movement towards a unified fiscal policy enforced by a supra-national body ii) ease of labor regulations iii) the elimination of subsidies to certain 'national champions' that are increasingly inefficient.  I believe we will all agree any of this is unlikely to happen. 

1. The Spanish sangria will continue at a good pace. 
2. Greece will remain in the Euro and will ask for more money from the EU that it will probably spend on ouzo. If you want to understand how the Greek economy works,  I suggest your watch Zorba the Greek (or read it). It will explain it all far better than any economy textbook.  
3. Francois Hollande and his Gauche Caviar will run what is left of the French economy to the ground. He will do so by pressing on with his tax increases which will eventually weight heavier on the middle-class as well as by scaring away investors and pushing through inefficient and populist industrial policies.  
4. Germany will narrowly avoid a recession with an anemic GDP growth performance.
5. The Belgians will eat frites.

United States

I am fairly optimistic about the prospects of the US economy. Of course, the country is now hanging on the edge of the fiscal cliff and at the mercy of the bickering maniacs in D.C.. If they can't reach a deal in the four days before New Year all bets are off.

1. 2011 and 2012 were years of uncertainty. There are very high levels of pent-up demand on the corporate and household sides. With the government no longer being able to kick the can forward (but again, we will see what they do in the next few days) this demand will be released in the economy in the manner of productive and infrastructure investment and household consumption.
2. Consumer debt deleveraging has continued at a good pace throughout 2012. Although the average American consumer seems to have learned his/her lesson and he/she still has to bring down the overall household debt to lower levels, they are likely to have a higher propensity to consume next year.
3. American businesses have reached the limit of productivity with their existing workforce and will have no choice but to start hiring more workers. I believe that with the uncertainty of 2012 behind them we will see a high uptick in the employment rate.
4. The housing market is making a comeback. Real estate prices increased 3% this year and will likely increase an additional 3% in 2013. Although this is a modest increase, it will go a long way to improve consumer confidence and spending. 
5. The increase in the value of properties will also give a modest contribution to employment as the construction industry becomes active once more 
6. American companies seem to be healthier than ever. US businesses have gone through a four year-long transition, shedding bad products, excess capacity, unproductive practices and outmoded consumer tastes. For the most part, this transition is almost over and they have emerged stronger and leaner than they were at the onset of the financial crisis. Even GM, the poster child for all that was wrong is now in a position to shed the government's grip and buy back its common stock held by the Treasury. Four years ago, not many people believed that would ever happen let alone that they would be able to invest U$7.3 billion in the United States.  
7. I am so optimistic in fact, that if D.C. gets its act together I believe the US economy will grow well above 3% next year with unemployment decreasing to 7.0%