What does 2012 hold in store for us?

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A year ago, many thought that life would get back to normal in 2011 after the financial crisis triggered the worst economic downturn for decades. Who'd have thought that we'd end the year once again perilously close to recession while the euro is battling for survival and some are asking whether Britain should leave the EU?

What does next year hold in store for us? More economic misery and the collapse of the euro? Here is a round-up of what experts think.
1. The world economy will slow
"We know the economy is going to slow in 2012 compared to 2011. The only real question is by how much," said Nariman Behravesh, chief economist of New York-based IHS Global Insight.
IHS expects global growth to slow to 2.7% next year, from 3% in 2011.

"What would make things worse is euro zone financial meltdown or a hard landing by China," he added. "Then we could see a world recession."

Last year, eight out of 10 of IHS's predictions turned out to be accurate. Read the 2012 forecasts here in full.

Spreading more gloom, Nouriel Roubini, economics professor at New York University's Stern School of Business, wrote in the Guardian: "The outlook for the global economy in 2012 is clear, but it isn't pretty: recession in Europe, anaemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies."

Jacques Cailloux, chief European economist at Royal Bank of Scotland, predicts a "survival of the fittest". "Will 2012 be the year of decoupling?" he asks.

"The biggest challenge to our forecast in 2012 is the apparent decoupling between the euro area and the rest of the world: with a recession forecast in the euro area and none elsewhere, including the UK (narrowly) and the US. There are not many historical precedents for such decoupling, suggesting at first sight that we may be either too pessimistic on the euro area or too optimistic on the rest of the world. The only recent precedent was in the early 1990s when the US entered recession while Europe did not as Germany was busy reunifying the West with the East which led to a massive domestic demand boost. Likewise, the ensuing European recession in 1993 did not bring the US economy down."

2. It's touch and go whether the UK economy will avoid a double dip
Britain will be bumping along the bottom for some time, but might just avoid slipping back into recession (defined as two or more consecutive quarters of economic contraction).

The two toughest quarters for the economy will be the fourth quarter this year and the first three months of 2012. Even the Bank of England, which has been accused of being overly rosy in its predictions, has a central forecast that growth will be zero in both quarters. That means there's close to a 50-50 chance of going into recession. But to many people it feels like we're still in one anyway. Unemployment is going up, the government's austerity measures are biting, wages are stagnating and inflation is high.

"The slow grind higher will restart as we head towards the summer, said Jeremy Cook, chief economist of travel insurance specialists World First. "Forgive me for coming across as overly negative, but everyone must realise that the next couple of years - regardless of whether you live in Kensington, Kettering or Keswick - are going to be tough. You don't get over 10 years of excess without a significant hangover."

Meanwhile, Roubini thinks the UK is double dipping due to the government-imposed austerity and Britain's exposure to the eurozone troubles.

City economists and other forecasters polled by the Treasury now predict the UK economy will grow by 1.2% next year, compared with just 1% this year. Both figures are a long way off the long-term trend growth rate of 2-2.5%.

Vicky Redwood, UK economist at Capital Economics, outlines a gloomy scenario. "The big picture is that the [UK] economy has ended the year on a pretty weak note. We are forecasting a relatively mild recession, involving a 0.5% contraction in GDP. However, clearly a much more severe downturn than this is possible.

"Our forecasts are based on the assumption that the eurozone breaks up, but in a limited and fairly orderly fashion. A more chaotic break-up, perhaps involving a renewed seizing-up of the interbank lending market, could see a drop in UK output more akin to the 7% contraction seen during the 2008/09 recession."

3. The pound is likely to strengthen against the euro
Cook said: "I do not think we will see a "double-dip" recession in the UK, but we will in Europe and this fits in with our estimations that the sterling-euro rate will grind higher over the course of the next 6 months to reach a high of €1.23 and €1.28 in 12 months." A pound will buy you around €1.19 at the moment. Good news for British holidaymakers.

Similarly, Chris Towner of foreign currency exchange broker HiFX thinks the pound will head higher to €1.25 into 2012. "The UK was one of the first countries to address the debt problem with austerity measures, helped by the new coalition government, and with a competitive and flexible currency the UK is well placed to weather the storm. Also, the diamond jubilee and the Olympics will make the UK an attraction, and give a much-needed confidence boost."

4. America is likely to avoid another recession
Things are starting to look up in the US where businesses have been hiring more workers and consumers seem more willing to spend. Will this be enough to keep Barack Obama in power? The eurozone debt crisis remains a big threat to the American economy, though.

Behravesh said: "Our current view is that the US can probably muddle through but Europe probably won't be so lucky."

5. A eurozone recession looks certain, but the euro will survive the debt crisis
The latest eurozone figures suggest the "eurozone economy is slipping into a 'mild' recession rather than falling off a cliff," according to ING economist Martin van Vliet. He reckons there won't be a repeat of the deep recession we experienced after the Lehman collapse.

If European leaders manage to hammer out a new "fiscal compact" with more centralised control over countries' budget and tax policies, markets will calm down. At the moment, this looks like the only way the continent's debt problems can be tackled in a meaningful way assuming the eurozone stays intact. Politicians in Germany and France will do their utmost to ensure the euro survives.

Behravesh said: "All indications are that the eurozone will suffer a recession in 2012 - a mild one if the region's sovereign-debt problems are resolved, or a deep one if they are not. Fiscal austerity is in full swing, bank credit is tightening, and confidence is plummeting."

6. Asia and emerging economies like Brazil will still power ahead, although China's economy has come off the boil
While not immune to a eurozone recession, Asia will continue to be the world's main growth engine in 2012. Japan's post earthquake bounceback should underpin the region's exports, and Chinese growth is expected to hold up at around 8-8.5% (still decent but below the double digit growth rates seen in recent years). But Chinese exporters have clearly been hit by the eurozone woes and foreign investment is down by 10%.

The pessimistic view from Roubini: "Flaws in China's growth model are becoming obvious. Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue. The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially eurozone demand. Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth."

7. Commodity prices will (mostly) move sideways
It looks like the commodity price boom that saw gold, silver, copper and grain prices rocket this year is over. Oil is the exception. Crude prices are on the rise again, pushing up petrol prices. How much higher prices go depends on the strength (or weakness)) of the global economy, as well as what happens in Iran, a major oil producer, vis-à-vis its nuclear weapons programme.

"The current high oil prices have the potential to strangle the economic recovery in many countries," said Fatih Birol, chief economist for the International Energy Agency. Crude has jumped to $100 a barrel from $75 in October amid signs the US economy will keep growing, which means higher demand for crude. Birol urged oil producers to consider boosting output. He said crude prices could rise to $150 by 2015 if oil-producing countries in the Middle East and North Africa don't invest $100bn a year to maintain existing fields and develop new ones.

Commodity prices are extremely volatile. "A hard landing in China, which would mean 5% growth, could lead to a 30% to 40% drop in prices for oil and other commodities," said Behravesh.

8. Inflation will come down
Inflation in the UK peaked at just above 5% this year, but the rate is expected to fall rapidly at the start of 2012 because last year's sharp rises in VAT, commodity and transport costs won't be repeated. Economists forecast inflation will end the year at just over 2%. Elsewhere in the world inflation will also ease, with economic growth weakening. "Without a spike in oil or food prices-triggered by a geopolitical events or bad weather-the inflation picture in 2012 will be quite benign," IHS Global Insight predicts.

9. Central banks will either keep monetary policy on hold, or ease further
Easing inflationary pressures and growing worries about growth mean that central banks around the world won't put up interest rates next year. The key debate is over how much money they will inject into their ailing economies. In the UK, the City expects at least another £50 billion to be pumped into the economy by February, with some predicting that £100 billion or more will be injected over the course of next year.

Those central banks that have slashed interest rates to near zero - the US Federal Reserve, Bank of England and Bank of Japan - will keep them there at least for a couple more years. That means mortgage rates will stay low in the UK (although some are edging higher as banks struggle with getting funding and pressure on profits), while savers will continue to suffer. Some central banks that had been raising interest rates have now stopped, for example the Reserve Bank of India, and others are now easing - the European Central Bank and People's Bank of China.

10. The London Olympics could be marred by transport issues, protest and price hikes
"The Olympics are famous for showcasing the extent of human endeavour," said Cook. "Unfortunately I believe the motto "Faster, Higher, Stronger" will be replaced by "Dirtier, Busier, Angrier" for the 2012 Games in London."

Our transport infrastructure is unable to deal with a busy Friday night in London, let alone with the expected 5.5 million a day visitors we will see at the games. Security levels surrounding the games will be higher than ever before for fear of terrorist attack, anti-capitalist protest or such like. Price increases are also assured as local businesses try and make a quick buck and taxi fares will shoot up. Assuming you can get a cab.
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