The global economy largely remains in a holding pattern, as economic recovery for the United States struggles, the European Union remains mired in debt and many emerging markets hold steady. While there is a good chance of additional monetary stimulus in early 2013, these measures have proven to be only a temporary boost in the past, highlighting the fact that long-term solutions are still missing in many troubled parts of the world.
U.S. Treads Water
The financial markets have been largely treading water in the U.S., as concerns about the country's debt, growth rates and unemployment remain. Chronic unemployment has left many consumers and businesses unwilling to increase spending. The result has been a stagnant economy with an inability to lessen its debt burden by increasing its gross domestic product (GDP) growth rates.
Despite these concerns, many commercial entities are significantly more optimistic about the future. December's ISM report showed that factories were more optimistic about 2013, with manufacturing revenue expected to increase 4.6%, although employment was seen as increasing just 0.8% in the critical industry. Meanwhile, BlackRock's Laurence Fink recently pointed out that U.S. corporations remain very strong with about $1.7 trillion in cash.
SEE: Economic Indicators For The Do-It-Yourself Investor
Eurozone Improves, but Troubles Remain
The eurozone crisis has improved throughout December, but the resignation of Italy's Mario Monti has sparked renewed concern. Italian elections in early 2013 could result in a fragmented government majority with limited capacity to pass important reforms. Higher bond yields could then push Spain closer to a funding crisis, as it has been reluctant to accept any funding ahead of a heavy year of debt refinancing in 2013 beginning in January.
While problems among major eurozone players have been flaring up, Greece made significant progress in December in announcing a buyback for its sovereign bonds. The bailout fund financed buyback should clear the way for additional aid from the International Monetary Fund and the European Central Bank. But, the country continues to struggle with a deepening recession driven by harsh austerity measures aimed at cutting spending.
Japan's Economy Contracts, but Bank of Japan Could Intervene
Japan's economy contracted by a greater-than-expected 0.9% during the third quarter, which is deeper than the 0.3% contraction seen during the first quarter, according to revised government data that came out in mid-December. Economists expect these bearish trends to continue into the third quarter, with sluggish exports to China taking a toll on the economy. The shrinking exports have led to a reduced current account surplus due to fewer exports and higher fuel imports.
The adverse economic conditions have also led to speculation that the Bank of Japan will loosen its monetary policy to help spur growth. Many believe that the bank will expand its asset-buying and lending programs, which currently stands at around 91 trillion yen or $1.1 trillion. Sources familiar with the matter told Reuters that it could expand by 5-10 trillion yen, which has already helped Japanese bond yields fall near their nine-and-a-half year lows.
SEE: Lessons Learned: Comparing The Japanese And U.S. Bubbles
Britain's Economy Remains Stagnant Amid Austerity
Britain's economy is expected to contract by 0.1% this quarter, compared with a previous forecast for growth of 0.8%, according to the Office for Budget Responsibility. Meanwhile, the country cut its 2013 growth forecast from 2% to just 1.3%, as it sticks to its austerity program. At the same time, concerns grew that Mr. Osborne's refusal to make about 17 billion pounds per year in additional cuts may lead to the loss of its prized AAA credit rating.
Some traders are concerned that these events could also lead to a triple-dip recession, with a poll from Reuters giving it a one-in-three chance. While the country technically exited its second recession in four years, many traders insist that the rebound was largely due to the London Olympic Games and extra working days that won't be repeated. Further headwinds from the global economy could also pose problems for the troubled economy.
Investopedia's Forex Outlook For January 2013: Upcoming Events To Watch
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