2012 - What's on the Horizon?
11 January 2012
The Boston Group in house view of the world economy.
For those that thought 2011 would be the start of a sustained, if modest, global recovery, the year proved to be quite a wake-up call. An absence of real growth in the UK, unemployment remaining stubbornly high at around 9% in the US and a crisis across Europe that few predicted characterised another highly turbulent year. Moving into 2012 from this highly uncertain position, what are the prospects for a return to growth in the global economy?
The answer to this question is likely to hang on three key factors. The management and outcome of the Eurozone crisis; the performance of the US economy in a presidential election year; and the ongoing performance of emerging giants such as China.
The Eurozone crisis can really only go one of two ways. Either the European Central Bank steps in to support bond markets to an as yet unprecedented level via strategic asset purchases, or the potential for the Eurozone crisis turning into a catastrophe remains feasible. To date, the ECB has lagged a long way behind the US Federal Reserve and the Bank of England in using quantitative easing (QE) as a tool to stabilise the crisis. Whilst the level of QE of the Fed and BoE has equated to around 15% of their relative GDPs, the extent of European Central Bank asset purchase falls well short of 5%.
In the US, the early action taken by the policy makers to bring interest rates close to zero and to use QE to stabilise the economy has served them relatively well. Whilst unemployment remains high, some early indicators of improvement can be seen. By extension, the US housing market may have begun to stabilise and consumer spending, which is critical to the success of the US economy, has shown some early indications of improvement in the second half of 2011. Arguably, these policy measures would be well supported by the existence of greater austerity measures as the impact of the Eurozone crisis and wider global uncertainty will also impact on US exports. Whether this happens may well come down to political appetite and the extent of a Republican or Democratic majority great enough to take these tough decisions ,which in turn may affect equity prices in the US.
And what of China? Whilst China has enjoyed near double digit growth for the past few years driven by huge export volumes, this level of growth is expected to slow marginally on the back of the economic woes in the Eurozone which is a major market for Chinese output. That said, China is still expected to remain the powerhouse of the global economy over the coming years.
Finally, the UK. High levels of action by policy makers has resulted in the UK being seen as a safe haven. With bond prices similar to Germany, the UK continues to attract money from abroad despite the significant fiscal deficits that it is tackling. The coalition government’s austerity measures, whilst lauded by the IMF, have yet to have the desired impact on domestic growth.
Amid this global uncertainty, some things remain the same. We at Boston are incredibly focused on delivering the finest service to our clients and intermediaries. Over the past year we have invested significantly in our technology, our service capability and in hiring industry-leading people to ensure that our structures and solutions for clients are of the highest quality. We send our best wishes for a successful 2012.
Greg Ellison
Group CEO
Boston Group Limited
The views expressed here do not constitute advice in any way and should not be relied upon. Boston will only provide specific advice under a formal legal engagement.