Forecasting the performance for global markets in 2012 is a a difficult undertaking even for the most accomplished economists. Forecasting is like driving a car blindfolded with help from someone looking out the rear window. Few economists are capable of forecasting what lies ahead in 2012 with precision.
Who could have predicted that Japan would have a major tsunami and nuclear disaster in 2011? Or who would have predicted that an Arab Spring would emerge and drive away some of their fiercest dictators in North Africa and the Middle East in 2011?
In a spirit of humility, I hope to write about some of the emerging political and economic forces that are underneath us now, waiting to hold the new changes in 2012 which will certainly drive the global markets.
2012 is an election year in the United States which means that the direction that the U.S. economy takes in 2012 will play a significant role in the re-election hopes for President Obama. Recent polls have indicated that the state of the economy remains on the top list of issues that Americans will closely weigh when they vote for the president and leaders in Congress.
Approval ratings for the current Congress remains at all time lows, especially after the payroll tax cut showdown last week with President Obama. In early spring 2012, Congress and the Senate will need to work together to reach a consensus about what to do with the payroll tax cut beyond the 2 month extension which expires at the end of February. More conflict is expected ahead with the formation of new fiscal policies.
The U.S. unemployment rate remains elevated at the mid 8 % level despite its recent fall below 9% and lower jobless claims. Now that the holiday season is ending and companies will likely be shedding some seasonal jobs, the potential remains for the unemployment level to remain high during the next couple of months.
Despite the recent positive news about housing sales, the housing market in the United States remains weak although many economists in the housing industry are calling for a bottom in the housing market in 2012. State governments, burdened by state debts and lower levels of federal support, will continue with austerity measures throughout 2012. Future growth in the United States could easily be dragged lower by a recession in Europe, which is appearing more and more likely with the passing of each day. However, the overall U.S. economy is in relatively better shape through the help of the Federal Reserve.
China has a lowered GDP growth rate in the mid 8% range for 2012, down from 9%. China’s industrial output is expected to grow 11% for 2012, easing from 13.9% in 2011. Concerns about a real estate and housing bubble across China has many Asian investors on edge, worrying about whether China will face a soft or hard landing. Fitch recently cut Asian 2012 growth outlook to 6.8% from 7.4 %, citing a weak global economy. The Japanese Yen remains elevated and will likely remain a safe haven currency holding in 2012 with more expected volatility to continue. The Korean peninsula continues to be vulnerable while North Korea is undertaking a leadership transition. Signs will emerge in the weeks ahead about the type of government and economy that Kim Jong Un plans to create for North Korea.
Most economists are expecting a recession throughout much of Europe especially during the first half of 2012 while the second half of 2012 is expected to see more growth. The future of the Euro and the Euro zone with its 17 members remain intact for now but concerns persist about maintaining the cohesiveness of the euro zone due to high sovereign debt levels and fiscal instability.
Since Britain refused to join the fiscal compact agreement, there remains many legal questions about imposing a unified fiscal policy throughout the EU. Britain refused to go along with the EU fiscal agreement because there were concerns over future ramifications of relinquishing British national sovereignty in critical areas such as the national budget and the banking sector.
High sovereign debt levels across the Euro zone along with liquidity concerns about European banks due to increased banking capitalization levels and exposure to periphery debt will weigh on the markets in 2012. The threat of more European downgrades will continue in 2012.
French banks have been relying on American money market funds to obtain financing in dollars. Now those money funds are pulling back from those loans because of questions about their stability.
Imposing austerity measures in a weakened EU economy can lead to a challenging economic environment whereby the economy further contracts, government revenues decline, and taxation because more difficult to impose on the general population. Creating growth in Europe will become a challenge in 2012; however, a weaker euro will help European exports and create better economic conditions for future growth to emerge across the European continent.
Recent instability and escalated violence in Syria are beginning to reveal signs of civil war. The situation in Syria is deteriorating. Soldiers are now fighting soldiers. The recent violence in the country shows that the civil unrest is threatening to inch the country closer to civil war as reported earlier by the BBC.
Iran remains elusive and defiant in the midst of new sanctions.