The 5 big economy questions for 2012

It's nearing the end of 2011 and what a year it has been.

After the collapse and near-collapse of several private-sector financial institutions in developed countries brought almost the entire world to its knees in 2008, this year, it was the turn of governments to inflict blows on the world economy. Sovereign debt became the new bad word for the financial markets in 2011.

The US had its sterling triple-A debt rating downgraded for lack of progress in cutting its mammoth government debt, while Greece and Italy frightened global investors by teetering on the brink of debt default. Countries in other parts of the world also came under the scanner for their government debt.

It doesn't look like things will get much better in 2012.

So, what are the key events to watch out for next year? Firstpost lists the top five events that will affect the global economy.

Will the eurozone tip into recession?

Increasingly, the answer to that looks like a yes, assuming we still have a eurozone in 2012.

 The 5 big economy questions for 2012

The sovereign debt crisis continues to rumble on. Getty

If there is no break-up of the eurozone, then it seems almost inevitable that the region will fall into recession.The shrill calls for belt tightening across the region, especially by Germany, is forcing indebted countries into implementing austerity measures - which will ensure lower growth and keep their debt-to-GDP figure high (when GDP falls, debt-to-GDP ratio increases further even without an increase in debt levels, forcing countries to enforce even harsher measures). This vicious circle will keep countries in low-growth mode for a pretty long time.

That will have significant impact because the European Union represents about 30 percent of global GDP. Exports of countries like India will be affected because exports could contract.

Meanwhile, the sovereign debt crisis continues to rumble on. Worse, a banking crisis is also simmering in the region, and threatens to affect banks around the world.

The year-end brings no respite: this week, all eyes are on France, which is bracing itself for a cut in its triple-A rating by agencies.

Continued on next page...

Will there be good news from the US?

It has been a year of modest gains for the US economy - holiday season spending is holding up, exports are rising, jobless claims are falling and the economy is adding jobs, according to this report in The Globe and Mail. Consumer confidence is rising and the housing market is also bottoming out.

It has been a year of modest gains for the US economy. AFP

Yet, the outlook for 2012 remains subdued. What happens in Europe and China will also play a part in how the US economy shapes up in 2012.A banking crisis in Europe, in particular, holds the danger of a spill-over effect in the US.

Continued on next page...

Will China experience a hard landing?

The possibility of a hard landing in China - a phrase referring to a sudden, sharp fall in economic growth - is a huge concern for the world.

Reuters

When demand in developed markets collapsed in the aftermath of the 2008 global credit crisis, China embarked on the world's biggest government stimulus programme to lift demand in its own economy, which, in turn, boosted economies across the world.

If China suffers a slump, the commodities market, in particular, will have reason to mourn. China is the largest consumer of everything from energy and steel to copper, nickel, zinc and foodgrains and there could be devastating impact on major commodity exporters like Brazil, Australia and the Middle East. On the flip side, lower commodity prices could hugely benefit importing countries like India.

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Will India experience stagflation?

India's economy is giving a big headache to policy makers. Inflation remains stubbornly high even as GDP growth seems set to fall below 7 percent in the financial year ending March 2012. Even though inflation is predicted to fall to around 7 percent by March, cost pushes across sectors will ensure that inflation remains relatively high for most of 2012.

Reuters

There is no guarantee that a rate cut (widely expected some time early next year after the Reserve Bank of India changed its policy stance moderately last week) will boost growth significantly. Blame that primarily on policy paralysis by the corruption-scandal tainted government, which has been unable to introduce any significant economic reforms. That could lead the economy into a period of stagflation -- stagnating growth and high inflation.

That could affect foreign investments - and the rupee's value.Foreign equity portfolio investments into India have virtually dried up after last year's $29 billion inflows. With the outlook for corporate earnings still bleak and the political fiasco over introducing foreign direct investment in multi-brand retail, don't expect any change in foreign investor sentiment any time soon.

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Will elections affect policymaking in countries?

This one is especially for investors who want to ace the markets in 2012. As a recent Firstpost articlepointed out, over the next year, as many as 12 countries and/or administrative regions around the world - which collectively account for 50 percent of the world's economy - will either go in for national elections or witness leadership transitions.

In many ways, the US presidential elections are the most significant. AFP

Some of these elections will be fought by rival contenders embracing economic philosophies that are poles apart; consequently, who wins and who loses will determine policy outcomes and worldviews that have a momentous impact.

In many ways, the US presidential elections are the most significant. Depending on who comes to power, policies on government spending on healthcare, decisions on corporate and individual income tax could differ widely, and have a dramatic impact on markets.

China is also in line for a political change of enormous significance. How these new leaders position their US policy will be crucial to global markets. Turmoil and political leadership changes in the Middle East will also influence oil prices.

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Updated Date: Dec 20, 2014 07:40:19 IST