Why a Global Economic Rebound Will Be Short-lived - by Panos Mourdoukoutas

The global economy may be ready to turn the corner, according to recent economic reports coming out from China, Germany, and the US.

In China, the HSBC Flash Manufacturing Index (PMI) rose to a 13-month high of 50.4 in November.  Separately, sales of washing machines, air conditioners and refrigerators increased by 6.5 percent, 0.5 percent and 22 percent, respectively, year on year in September. In Germany, business confidence jumped to 101.4 in November from 100 in October, well ahead of expectations of 99.5, while exports boosted growth. In the US, existing housing sales, housing starts, and initial claims and leading economic indicators beat market expectations.

The trouble, however, is that this rebound, if it is for real, may be short-lived. Globalization faces several threats that will put the breaks to future growth. Some of the obstacles include:

1.   Rise of re-regulation in the US. Since the early 1980s, the US has been the champion of deregulation, a tailwind for American industries. In the aftermath of the subprime crisis, the US economy is on a re-regulation track that burdens corporations with additional costs. Most notably, Obamacare is imposing an enormous cost on smaller corporations, the engine of job growth.
2.   Proliferation of the European sovereign debt crisis. This threatens to culminate in a “credit event,” the failure of a major financial institution or a country to stand up to its debt obligations by missing an interest/principal payment. In a highly interdependent world, such an event could fuel a domino (Lehman-style) effect, with big losses for major credit institutions. As Rogoff and Reinhart put it in an interview in this weekend’s Barron’s: “Credit events don’t end with Greece. This is not a Greek problem. This is a European problem. So be prepared fo a lot of volatility surrounding future credit events.”
3.   The dismantling of “soft socialism” — drastic cuts in a European welfare system, which has boosted consumer spending and reinforced social peace for six decades.
4. The escalation of the Middle-East crisis threatens to turn into a military confrontation between Iran and Israel and Turkey and Syria in an already unstable era.
5. The China-Japan conflict over territorial disputes that threatens to turn into an economic war, if not to an open military confrontation in the world’s fastest growing region. Japanese multinationals like Honda (NYSE:HMC), Toyota (NYSE:TM) and Nissan (OTC:NSANY) have already seen the impact from this conflict.

Already, a number of US multinationals, from IBM (NYSE:IBM) to General Motors (NYSE), Intel (NASDAQ), and Federal Express (NYSE:FDX), Caterpillar (NYSE:CAT), and Ford (NYSE:F) have been reporting lower earnings because of a global slow-down. Could anyone imagine what would happen to the earnings of these companies should any of these threats gets out of control?

The bottom line: As long as the world is burdened with debt, government policies that constrain domestic market growth, and old and new animosities that constrain international trade, any rebound is doomed to be short-lived.

Read more: Why a Global Economic Rebound Will Be Short-lived - Forbes