Economic Forecasts 2012

The global economy faces continued difficulties in 2012. However, with the global economic slowdown, oil prices are unlikely to rise, therefore there may be a relief from rising cost-push inflation factors.

UK in 2012

The UK economy has experienced 4 years of disappointing economic growth. In 2012, there is a mixture of forecasts on prospects of a double-dip recession. Official forecasts (Bank of England, OBR) predict sluggish growth of 0.7%. Other forecasters are less hopeful, expecting a double dip recession in the first half of the year. Reasons for double dip recession in UK include

• Government spending cuts
• Rise in unemployment to over 2.6 million
• Fall in living standards from rising cost of living and weak wage inflation
• Continued credit crunch and reluctance of banks to lend

Goods news for the UK in 2012, will be the fall in inflation, which gives scope for possible more monetary easing.

More:

• UK economic forecasts
• Interest rate forecasts

UK bonds have also escaped the pressure felt by Eurozone economies.

However, the disappointing growth will lead to lower than expected tax revenues and therefore higher government borrowing.

China in 2012

China has enjoyed two decades of constant and rapid economic growth, however in recent months there have been increasing signs of overheating. China faces problems of

• Unregulated bank lending
• Boom and bust in housing market
• Growing inflation.

There is a risk that China could experience a bust in the property market like that of Europe and US. A downturn in China would add to the economic gloom and lead to lower economic growth.

Eurozone in 2012

The Eurozone is likely to face a recession in 2012. Throughout the Eurozone there has been spending cuts and drive to austerity. HOwever, there has been no offsetting monetary easing or depreciation in the exchange rate. In Q3 2011, Ireland faced one of its biggest drops in GDP

Rising Bond yields in EU cause fear for future of EU economy - increasing need for spending cuts, but no policies to increase growth.

The Dollar in 2012

The US dollar could be one of the stronger currencies in 2012. The US is likely to recover earlier than the Eurozone. Compared to the Eurozone, US bonds look relatively secure. Given all problems in Eurozone, investors are likely to prefer the 'relative' security of the US and the fact the Federal Reserve can act as lender of last resort.

Report on UK Economy for 2010

A report on current state of UK economy and prospects for 2010

2010 will be a difficult year for the UK economy. After the deepest recession since the 1930s, the outlook is for a sluggish recovery. Though recovery is welcome, it still leaves the problem of spare capacity, high unemployment and record levels of peactime government borrowing. It will be a difficult tightrope between boosting economic growth whilst keeping borrowing under manageable levels.

Forecasts for Euro 2010

The Euro has remained strong during the economic and financial crisis. This is because

Euro banks had less exposure to the toxic mortgage loans which defaulted.
The ECB appears less keen to purse policies such as quantitative easing (increasing the money supply) to boost the economy.
The Euro is increasingly seen as a viable alternative to the US Dollar as a world reserve currency.
The Recovery in Eurozone began quicker than elsewhere such as US and UK.

Despite these factors it is worth bearing in mind, the Euro faces real problems, especially on the periphery of the Eurozone.

Greece is facing a debt mountain of with a government debt of over 110% of GDP. Spain and Ireland's economy also look vulnerable as they struggle to survive the impact of a collapse in house prices.

The Euro looks overvalued. Euro exports are increasingly expensive compared to other currencies. This overvaluation could derail the economic recovery and make the ECB pursue a looser monetary policy to boost growth.

2010 will be a difficult year for the ECB, they have greater concern for low inflation and could be first major central bank to raise interest rates. But, the strength of the Euro could be as much a curse as a blessing and this could lead to downward pressure on the Euro.

2010 could be the year when the Euro's strength starts to change and the currency depreciates.

Forecasts for Dollar in 2010

US Trade weighted index.

The Dollar has been in long term decline since 2000. There was a strong rally at the start of the recession.

This rally was due to the realisation the economic crisis was spreading to the rest of the world, and comparatively, US securities looked relatively attractive.

however, since the start of the year, the US recovery has taken longer to materialise whilst Asia has surged ahead. This has highlighted the long term factors which are pushing the dollar lower. These included:

• Current account deficit of nearly 5% of GDP. This outflow of currency means there is less demand for dollars.
• Decline in economic dominance of US. US share of world trade is forecast to fall as China, India and the EU become relatively bigger. This will reduce the demand for the dollar as the world's reserve currency.
• Growing US federal deficit which now tops $12 trillion and is forecast to continue growing quickly. This makes savers nervous about the future credit worthiness of the US. There are fears the US government may respond to this growing debt by inflating away at least part of it.

I think the inflationary threat of the US deficit is exaggerated, but, even so, I think the US dollar will continue to be weak in 2010 due to the expected sluggish nature of the recovery.
Interest rates will remain close to 0% as the economy tries to pick up the spare capacity.

US Unemployment Forecasts

Source: Federal Reserve of Governors

Unemployment forecasts by Federal Reserve for 2010, 2011 and 2012.

The main problem the US has is the large amount of spare capacity in the economy. Output has fallen 6%, whilst potential real output has continued to grow. This means the US is facing alot of spare capacity and unemployment.

In the US, flexible labour markets mean that it is easier for firms to fire workers. This could mean unemployment could fall faster than in Europe (where unemployment rose slower). But, at the same time, there are still those who fear that the official unemployment rate underestimates the true rate of unemployment because it ignores the fall in hours worked.

To a large extent, the fortunes of unemployment depend on the strength and resilience of the economic recovery. If growth picks up and increases by 4% a year, then there is potential for unemployment to fall quickly.

However if the growth rate is sluggish or even if we face a double dip recession, unemployment could rise further than these forecasts

Interest Rate Forecasts 2010

Emerging from one of the deepest recessions on records the outlook for future interest rates remained mixed. After falling to close to 0% in US, Europe and UK, there is much debate about how much they will rise in 2010.

• Despite zero interest rates being quite rare in Western economies there are various factors at work which may keep interest rates low for the foreseeable future. These factors include:
• Depth of recession and amount of spare capacity means there is little prospect of future inflation
• Banks still reluctant to lend and this could hinder the pace of economic recovery.
• Governments face large budget deficits which will require higher taxes or lower spending. These will tend to depress economic growth in the next year or so and therefore lead to low interest rates being maintained.
• The scale of quantitative easing doesn't as of yet seemed to have really affected the broad money supply growth.
• Unemployment keeps rising and the prospect of swine flu could hinder growth further.
• If the Japanese experience is anything to go by interest rates could stay low for a while.

When will Interest rates rise?

• Despite the above gloomy factors. There are some more positive factors affecting the economy and which may cause a rise in growth rates and interest rates. In the UK, house prices have stabilised after two years of sharp falls. (why have house prices stopped falling) Although it may still be too early to call an end to the house price slump, it is an encouraging sign and could help the economy recover. Rising house prices would increase inflationary pressure and lead to higher rates.
• Recessions don't last forever and when the economy recovers, interest rates may leave their record lows to maintain a positive real interest rate. a 5% interest rate would be more typical if economies meet their 2-3% inflation targets

Housing market statistics

Outlook for Dollar

After displaying remarkable resilience since the economy plunged into recession, analysts are now suggesting that the underlying economic fundamentals will push the dollar lower as technical factors come to an end.

The global recession cause a technical increase in demand for dollar as people looked to hold more cash and less currency and securities from emerging economies.

However, the dollar could now be facing a decline in 2009. Due to:

• Large current account deficit causing outflow of money from US. Although deficit has reduced, capital flows are drying up in global climate.
• Interest rate cuts. US interest rates are heading for 0% as the US experience consumer price deflation for second month in row.
• Large rise in public sector debt and increase in money supply to finance it.
• Loss of confidence in US economy.

US dollar predictions 2009

The UK Economy in Crisis

Guest Article:

Mr Micawber for Prime Minister

What the Dickens

So the world economy has plunged into recession or depression as a result of over borrowing, toxic debt, unsustainable mortgages and blind panic. So what is Gordon Browns chosen route for the next 3 years a great spending splurge by reducing taxes and glad handing more give-aways than Father Christmas.

Give Aways

• The British gold reserves were sold (almost given way) at the bottom of the market. Gold rocketed in price after Gordon’s munificence.
• Off the balance sheet borrowing, of the sort that brought down Enron and others, has been a staple ploy of Gordon. PFI must mean potentially flaky investments and taxes for years to come.
• ‘Selling’ Inland Revenue buildings to a tax have based company mmm makes sense to Gordon!
• Northern Rock was baled out at a cost of unknown amounts
• Banks guarantees were given to all in sundry and reinvestment capital has been provided.

With this sort of liabilities to fund the national debt was going to grow exponentially and no one can put a total value on the exposure. Great protection of the nations wealth that seems to be. Perhaps large companies were right when they started leaving these shores for lower tax economies.

Toxic Politic

What solutions did we get yesterday.

• A cut in VAT when Ireland increased there rates of VAT perhaps that was to reduce the value of frauds as only 15% will now be creamed off by the fraudsters.
• A shuffle of the chairs on the deck, currying short term favour by putting money in the pockets of those struggling to repay credit card debts built up over the last few years.
• Gordon fails to recognise the party is over – we are over spent – he is over spent – his political future is spent and Charles Dickens spent his time on a futile story of Mr Micawber.

Conclusion

Do not vote conservative at the next election – I wouldn’t wish this can of worms on anyone

UK in Exchange Rate Mechanism - ERM

Example of

• In the late 80s, inflation in the UK was a problem; it was increasing above 10% following the Lawson Boom.
• Therefore, the government decided to join the ERM, a semi fixed exchange rate between UK and German D Mark.
• However, many now feel the UK entered at a rate which is too high.
• The high inflation made the UK less competitive reducing demand for sterling. Also as the economy was going into recession, Sterling became weaker. Investors were selling Pounds; Therefore, the government had to keep intervening to protect the value of the exchange rate. This involved buying pounds on the foreign exchange markets and increasing interest rates.
  
• However, because the economy was in recession, high interest rates made it worse. It led to record levels of home repossessions and house prices collapsed. On of 16 September 1992, the government tried raising interest rates to 15% in a last ditch attempt to save the value of the pound.
  
• But, the market correctly predicted the government was bluffing and could not keep interest rates that high. Speculators like George Soros made over £1 billion, selling pounds to the UK Government. People kept selling and at the end of the day the government gave into the inevitable and devalued the pound. This allowed interest rates to come down and the economy recovered.

• ERM at BBC

Economic Downturn definition

An economic downturn suggest the economy is entering into recession. A recession is a period of negative economic growth with falling output and rising unemployment. The official definition of a recession is - negative economic growth for 2 consecutive quarters.

The definition of an economic downturn is less strict. For example, many felt we were in an economic downturn even with positive growth. This was because the growth rate was slowing down, house prices were falling and people could see the economic cycle and shifted from a boom period and we were heading towards bust.

To define an economic downturn it is useful to mention some of the main features of an economic downturn:

• Negative or very low economic growth
• Rising unemployment
• Falling asset prices - shares and house prices
• Low confidence and falling investment
• Rising spare capacity
• Increasing government borrowing