Nervously whistling past the economic cliff

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The deployment of election campaign-style tactics to push hardened political positions for solving the “fiscal cliff” is making a lot of folks very nervous both inside and outside the U.S. – largely because the global economy remains in a very precarious spot, with the margin for error extremely thin.

For example, the latest Economic Outlook published by the Organization of Economic Cooperation and Development (OECD) paints the economic situation in very stark – and very unflattering – terms and is warning that, even if the U.S. nails down a solution for the “fiscal cliff,” don’t expect boom times to begin.

Indeed, the OECD’s economists believe the global economy is expected to make what they call “a hesitant and uneven recovery” over the next two years if (and this is a big “if” mind you) decisive fiscal policy action is taken both in the U.S. and Europe.

“The world economy is far from being out of the woods,” stressed OECD Secretary-General Angel Gurría (seen above on the right) this week at a press conference in Paris. “The U.S. fiscal cliff, if it materializes, could tip an already weak economy into recession, while failure to solve the Euro area crisis could lead to a major financial shock and global downturn.”

Sure, you’ve heard such dire warnings before. But here’s the clincher: According the OECD’s projections, even if the “fiscal cliff” is avoided, U.S. gross domestic product (GDP) growth is only expected to reach 2% in 2013, before rising to 2.8% in 2014.

The outlook is far gloomier for the Euro area. For even if sovereign debt issues with nations such as Greece, Spain, and Portugal are at least brought under control, the OECD predicts Europe will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year before growth picks up to 1.3% in 2014.

“The Euro area crisis remains a serious threat to the world economy, despite recent measures that have dampened near-term pressures,” Gurria pointed out. “Adjustment of deep-rooted imbalances across the euro area has begun, but much more is needed to ensure long-term sustainability, including structural reform in both deficit and surplus countries.”

The OECD noted that more needs to be done to tackle negative links in the Euro area between public finances, bank solvency and risks that any country may have to leave the European Union (EU). In the long run, this requires a fully-fledged banking union with fiscal backstops, with the recapitalization of banks should be undertaken where necessary, the group stressed.

Even if all that is successfully done, total GDP growth across the U.S., Europe and Japan – the three regions covered by the OECD – is projected to remain flat, with this year’s 1.4% GDP rate re-occurring in 2013 before gathering momentum to top 2.3% for 2014.

[To just round things out: For Japan, GDP is expected to expand by 0.7% in 2013 and 0.8% in 2014 – nothing to pop champagne corks about, that’s for sure.]

The key metric trucking needs to watch closely in the short term is U.S. GDP, stressed Noel Perry (at right), senior consultant with research firm FTR Associates during its quarterly State of Freight webinar a few weeks back.

Perry explained that 2% GDP growth is the “magic number” for trucking; above that level, freight grows rapidly, but when GDP drops below it, tonnage falls just as rapidly.

That’s why the OECD’s projection for flat 2% U.S. GDP growth for the U.S. next year as the best case should worry truckers. Because that means if anything goes wrong and GDP falls below 2%, freight tonnage will fall with it.

For example, FTR’s Perry noted that impact of a European economic collapse on the U.S. economy would be severe – shaving 1% to 1.5% off U.S. GDP, substantially reducing economic growth or even pushing the county back into a recession. Similar GDP fallout could also occur if the “fiscal cliff” becomes reality.

It doesn’t help that the OECD is also predicting sustain levels of unemployment in the U.S., Europe and Japan, with around 50 million jobless people in the OECD area. “Unemployment is set to remain high or even rise further in many countries unless structural measures are used to boost near-term employment growth,” the OECD’s Gurria warned.

Still, there is some good news to be had in the group’s most recent outlook. For starters, after softer-than-expected activity during 2012, growth has begun picking up in the emerging-market economies, with increasingly supportive monetary and fiscal policies offsetting the drag exerted by weak external demand.

In Asia, China’s GDP is expected to grow at 8.5% in 2013 and 8.9% in 2014, while GDP is also expected to gather steam in the coming years in Brazil, India, Indonesia, Russia and South Africa. That should bolster demand for trade and thus freight demand, with some of that n doubt filtering down to trucking’s level.

Let’s hope then that it’s the good tidings that come our way this holiday season and beyond.

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