Homer Alaska - Business

Story last updated at 4:50 PM on Wednesday, February 1, 2012

Economists see fair outlook for 2012, but forecast for following year on the dark side



By Tim Bradner
Morris News Service - Alaska

This year looks OK.

Watch out for next year.

That's what team members at Northern Economics says as they peer into the crystal ball.

Jonathan King, senior economist at Northern Economics, an Anchorage-based consulting firm, presented the Alaska portion of the World Trade Center Alaska's annual economic outlook presentation Jan. 18, along with Wells Fargo Bank's Aryan Vasquez, senior economist and vice president for global emerging markets, who spoke about the global economy.

Greg Wolf, president of the World Trade Center Alaska, was much more upbeat, however, in his assessment of Alaska's export trade, mostly with Asia. Exports from Alaska passed $5 billion in the value of products sold overseas in 2011 for the first time, Wolfe said at a luncheon where the presentation was made.

King, of Northern Economics, touched first on the nation's economy, which is in a sluggish recovery from the sharp recession.

Unemployment is still a major concern across the United States and a particular worry centers around the long-term unemployed, he said.

Forty-five percent of the nation's jobless workers have been unemployed for a long time now, and typically at this point in a recovery, that number is 25 percent, King said.

Possible explanations for this include a mismatch of skills as employers start hiring, King said.

"Many of the unemployed don't have the skills employers need. Also, many of the skills may be obsolete as the economy continues a change," toward higher technologies and information services, he said.

As for businesses, they are still sitting on cash, King said, waiting to see which way the national and global economic winds blow. There is a major concern over inflation, for the long-term, pushed partly by high commodity prices including for oil.

Alaska, however, is still in a good situation, at least short-term.

"Twenty-nine U.S. states have budget shortfalls," but not Alaska, King said.

Thanks to high oil prices, the state will see another big surplus this year, and a $13 billion cash reserve is on hand in the state treasury to cushion against a downturn in revenues, which is expected next year. There's also the state's permanent fund with a market value just under $40 billion. The principal of the fund can't be spent, at least for now, in state operations, but the fund's annual income is available for appropriation.

For now, Alaskans feel upbeat about the state's economy, King said. A quarterly consumer confidence survey published by Northern Economics shows confidence increasing, with 20 percent of Alaskans polled believing things are getting better and 65 percent of the opinion that the economy is stable.

On the Alaska jobs front, the state's economy is performing better than expected. Northern Economics had projected a 1 percent job growth in 2011 but it actually turned out to be 1.6 percent, King said. Not a robust figure, but better than in other states.

The Gross State Product also grew faster than expected. Because it includes the value of oil as well as the sum of all other goods and services produced the rising price of oil influences the number. At an average oil price of $98 per barrel, which had been forecast earlier, Alaska's GSP was estimated at $48 billion. However, the actual price is closer to $108 per barrel, which will push the annual GSP to $52 billion, he said.

However, things look less certain for next year. "We're really concerned for 2013," King said.

"There will be declining federal funds, including a likely 30 percent reduction in federal funds for transportation," which includes highway construction. "Oil production is declining, and it's going to catch up with us," he said.

Wells Fargo Bank's Aryan Vasquez, in his remarks, expressed deep concern about the global economy and particularly the European debt crisis, which seems likely now to plunge the Euro-zone nations into recession. That will have ripple effects across the world, including in the United States, as the economy continues a slow improvement. In Asia, where things are booming and basically propping up the global economy, problems in Europe could have a dampening effect.

If it happens, that will have ripple effects in the United States and in Alaska, where trade with Asian nations and even Europe is important, Vasquez said.

"If there's not recession in the EU now, there soon will be," Vasquez said. "There is an increasing concern for the regional banking sector if the sovereign debt crisis of Greece, Italy, Spain and Portugal isn't resolved soon."

What's possible is a freeze-up of liquidity for banks and businesses like that which threatened the United States in 2008 and 2009.

This is now affecting the outlook for all of the developed nations, including Europe, the United States and selected nations in Asia, like Japan.

"We shouldn't expect much in 2012, at best a very low-growth trajectory, much like Japan has seen," Vasquez said.

For emerging markets, particularly in Asia and South America, the outlook is rosier.

Eastern Europe and even Africa is doing better than some of the other Euro-zone counties.

"The outlook is more positive for Turkey and South Africa," as other examples, he said.

The debt crisis aside, structural factors propelling growth in the emerging markets are the demographics.

"Populations are rising in developing nations as compared with Europe, where populations are falling," Vasquez said.

In many developing nations real incomes are rising and a large middle class is emerging. There is an incredible manifestation of wealth, and there are investments being made in infrastructure and technology advances, and in many nations a rebalancing of policy away from having economies led by exports to economies depending in part on domestic spending, he said.

"China is playing an important role in stepping in and largely replacing the European Union as a growth engine, but China is also sucking commodities out of Africa and Latin America and, more important, is playing a larger role in finance and credit," Vasquez said.

Vasquez expects things for emerging markets to continue but a lot will depend on long-term structural improvements including fiscal reforms, continued political stability and improved transparency, he said.

Meanwhile, the greatest risk for 2012 remains with the Euro-zone nations in Europe.

Tim Bradner is a reporter for the Alaska Journal of Commerce.

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