CHICAGO, Ill. — The world economy will be in the doldrums for another three to five years as key economies wrestle with crippling debt.
“About 50 percent of the global economy at this point in time is really struggling with sovereign debt of one type or another,” said Terry Barr, senior director of the knowledge exchange division for CoBank, a U.S. co-operative bank serving agriculture.
He said people are familiar with the economic problems in Greece and Spain, but Japan, the United Kingdom and the United States are also running large deficits with government debt-to-gross domestic product (GDP) ratios that are similar, or in the case of Japan, far exceeding Spain’s.
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Bringing those deficits under control will create a fiscal drag because every $100 billion in increased taxes or decreased government spending means less stimulus in that economy, reducing prospects for economic growth.
Agriculture is somewhat insulated from those economic realities because it is in the midst of a supply driven market in which tight global stocks buoy grain prices.
However, at some point it will switch to a demand market and growers will then feel the impact of the slumping global economy.
“We’re about to embark on what will probably be a multi-year transition with major fiscal and monetary corrections over the next three to five years,” Barr told delegates attending the DTN/Progressive Farmer Ag Summit 2012.
He doesn’t expect a rapid turnaround in fortunes in the European Union, partly because Germany, the driver of the European economy, will become preoccupied with its election slated for September. Barr expects decisions will be slowed or put on hold during the election year.
France runs huge deficits with a debt-to-GDP ratio of 70 to 80 percent, which is getting close to the EU’s other floundering countries.
“It’s one thing to talk about Greece and Italy. It’s quite another to talk about France having a problem,” said Barr, refering to the fact France’s economy is much larger.
Euro zone economic growth is essentially non-existent and will languish around zero for another two to three years. That doesn’t bode well because the EU represents 20 percent of the global economy.
The U.S. is facing the fiscal cliff of $528 billion in tax increases and spending cuts if the Republicans and Democrats can’t come to an agreement. That would take 3.3 percent out of an economy that is expected to grow by 3.7 percent in 2013, which would be nearing recession territory.
Barr thinks the warring political parties will come to a vague agreement to avoid the fiscal cliff, but the U.S. still has a massive debt reduction task ahead of it, which will constrain growth. He anticipates two percent economic growth in the U.S. next year and similar lackluster outlook for many years to come.
The economic doldrums in the EU and the U.S. will weigh on the Chinese economy because they are China’s two biggest trading partners. China’s annual economic growth has slowed to eight percent and is in danger of falling below that level if the government doesn’t lower the basic bank rate early next year to stimulate the economy.
A slowdown in the Chinese economy would have huge ramifications for North American agriculture, which relies heavily on Chinese demand for products such as soybeans and canola.
“I remain optimistic about agriculture going forward, but I see significant changes coming because of the magnitude of the fiscal drag that is going to be created in the U.S. and in Europe that’s going to spill over into China,” said Barr.
