Another rocky ride in store

aksaroya —  12 December 2012 — Leave a comment

By Ramona Dzinkowski, economist and business journalist

There are many challenges for accountants in 2013.While a slow recovery is on the cards, international companies have a lot to lose from the eurozone crisis and uncertainty in the US.

With 2012 coming to a close, companies around the world are bracing themselves for what could be another bumpy ride in 2012. In terms of growth, equity market stability, fiscal policy and political change and unrest, the messages are mixed.

For bullish observers, increases in consumer spending, industrial production, and export growth in the UK – driven in part by unexpectedly strong automotive sales – is enough, while the bears remind us to keep focused on risk. According to recent International Monetary Fund (IMF) forecasts, the economy in 2012 is in a slow, but potentially stable recover mode. Global growth is expected to land at 3.5 % this year and 3.9% the next overall – pulled down by advanced economies and propped up by emerging markets. This compares with more normal levels of about 5%. Although below more recent levels. China will power on in 2012, and India remains on relatively solid ground. Europe, in comparison, will continue to struggle to pull itself out of negative territory.

International companies specifically, which depend on the European Union (EU) for a large portion of their sales, are cringing at the region’s prospects for the remainder of 2012 and well into 2013. US companies with the largest exposure to the downturn in the EU are chemical manufacturers and makers of transportation equipment, computer and electronic products, and machinery.

Government austerity measures in Europe and elsewhere will also be felt in varying degrees. World government spending is predicted to decline by 0.09% of gross domestic product (GDP) in 2012 and 2013, most likely dampening global demand, with most significant cutbacks to occur in advanced economies where deficits will fall from 5.2% this year to 4% in 2012. Fiscal tightening during periods of weak consumer demand, high unemployment and tight credit markets will endanger economic recovery in 2012. Emerging market growth is less at risk, where deficits are expected to run in the neighbourhood of 1.7% of GDP in 212 and 1.4% in 2012 and government cutbacks are less aggressive.

Finance executives are also keeping a close eye on the political uncertainty in the US. More specifically, whether or no the US can keep from falling off the fiscal cliff at the end of 2012. The gist of the ‘cliff’ problem is that the changes to fiscal policy that are due to come about in early 2012, and are due to shave an estimated US $560bn off the government deficit, just aren’t going to be manageable in the current economic climate. Fears persist that due to the current impasse between political parties, nothing will be done to change the current laws, many of which are were designed a decade ago. The resulting forecast is that the US will be thrown back into recession early in the year, potentially reducing GDP growth to 0% for 2012 and pushing unemployment beyond 9%..

Finally companies are concerned about the geo-political forces at work in the Persian Gulf that could trigger an oil prices shock.

How has all this affected the day-to-day management of companies around the world? In January I’ll ask risk managers of some of the world’s largest companies exactly that question.

This post first appeared in Accounting and Business International November 2012


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