There’s no quick fix for the New Year economic hangover
I know that in writing an economic outlook piece for the year ahead in the middle of yet another ’Last chance to save the euro’ summit, is not without risk: by the time the time of publication my thoughts may look horribly out of date.
The market view on the prognosis for the euro crisis evolves hour by hour rather than week by week, but our base case assumes that a way is found through the impasse and that peripheral debt markets stabilise in the next few months, preventing a disorderly break-up of the eurozone.
However, downside risks are significant and a euro break-up would create a much more serious crisis than the Lehman Brothers event.
A successful outcome of the December summit would buy sufficient time for fiscal reforms to take effect over years rather than months and give a big boost to confidence. Yet the crisis has gone on for long enough to act as a significant dampener on economic activity and the outlook for the world economy has deteriorated.
US economic news has actually improved somewhat in recent months, but this is the exception. The general pattern of data in Europe, the UK, China and even hitherto booming Brazil points in the direction of a marked slowdown in growth.
The UK’s economic situation is weak, although there are some glimmers of hope, particularly with regard to inflation.
Inflation is a year-on-year calculation and, as the January 2011 VAT hike and pressure from higher commodity prices fall out of the annual comparison, the rate of inflation should fall quite sharply.
This should take some pressure off household finances, although it will be offset by a further rise in unemployment unless the economy grows faster than we think likely.
The Bank of England will keep interest rates at their present level, providing important support for the housing market, although we do not expect to see a significant pick-up in the volumes of mortgage or housing transactions.
Looking overseas, while central banks and governments in the developed world have run out of conventional policy instruments, there is still scope for policy stimulus in the emerging block and this is set to become one of the key trends in the first half of 2012.
With oil prices having stabilised, inflation rates should fall and allow those countries that had embarked on a policy-tightening phase – via higher interest rates and curbs on lending – to give their economies a booster shot.
2011 proved to be a watershed year for global economics and politics: we saw significant political change in the Middle East and North Africa; governments around the world had to tell their electorates uncomfortable truths about the balance of taxation and public spending; and the half-baked euro project finally faced reality. No doubt all these issues will remain agenda items for investors in 2012.