I recently had the pleasure of being invited to the Bank of America - Merrill Lynch 'Global Research Macro Year Ahead Press Briefing' in the City of London. The heads of EMEA Research, of European Equities Strategy, International Credit Research and other high-powered banking types gave their prognoses on the prospects for the global economy in 2012. The gathering had all the joie de vivre of a wake.
Laurence Boone, the polished 'Head of Developed Europe Economics' was first to burst the bubble of positive expectations: She expects a drop in GDP for Europe as a whole of 2-3% in 2012, meaning a continuing European recession (which she said had already started in 4Q2011) that will continue through the whole of the first half of 2012. European banks will undertake 'deleveraging' (paying off debts) of around Euro1.5trillion in 2012.
Athanasios Vamvakidis, 'Head of G10 Foreign Exchange Strategy' suggested that 'the Euro is like a skydiver without a parachute,' and that it is inevitable that the ECB (European Central Bank) will be forced to step into the markets. However, he said, 'things will have to get a whole lot worse before anything is done.' He concluded that the Euro is set to weaken against other currencies and that investors are 'running out of safe havens.'
Credit markets are shrinking, banks will reduce lending and corporate entities will struggle to roll over (or extend the maturities of) debt. 'Corporates are likely to try the bond markets to raise cash, but will probably fail.'
David Hauner, the Head of EMEA (Europe, Middle East, Africa) Economics and Fixed Income Strategy, suggested that Asia will see strong growth of 7% in 2012, while Latin America will also see growth, of over 3%. Russia will continue to see growth of nearly 4% while Poland will be an island of growth (around 2%) in a lacklustre Eastern European scene of recession. David stated his belief that both Hungary and Ukraine will require IMF help in 2012. However, South Africa (and Nigeria) are both set to 'surprise on the upside' - banker-speak for 'do rather well.'
Sabine Schiels, 'Head of Fundamental Commodity Research' gave some bold predictions for trends in the coming year: both coal and copper prices will fall, while Brent Crude will average US$108 in 2012 - a robust figure in a global recession, but propped up, according to Sabine, due to limited OPEC refining and production capacity. She echoed her colleague's suggestion and forecast that not only the ECB but also the US Federal Reserve will step into the markets again in 2012, with the Fed deploying an additional bout of QE (quantitative easing, or printing/creating money from nowhere). Perhaps most boldly, she suggested that gold (currently trading at around US$1600/oz) will trade for US$2000-2500/oz by summer 2012 (presumably in response to a period of economic turmoil). If she is confident in her own predictions, I do hope that she will back-up her words by betting her bonus on the price of gold. (She may have the last laugh on this one).
Meanwhile, Michelle Meyer at the same financial institution has suggested that the US housing market may finally be approaching a corner (this is good news, since it was US sub-prime that kicked-off the first leg of this now-apparent double-dip recession). "In our view," says Michelle, "the construction sector has found a bottom and will add to growth in 2012 through the multifamily sector and renovations. But, we see further pain from home prices with declines through to early 2013, translating to a cumulative drop of 38% from the peak. This feeds back into the macroeconomy negatively through the wealth and credit channels. We are still at least two years away from a true housing recovery, in our view." So, not all good news then.
Michelle continues, "The housing crisis is far from over, in our view. Over the next two years, we should expect more of the same as the market struggles to clear foreclosures, leaving downward pressure on home prices and sluggish single family housing construction. We are getting closer to the end and when the market turns we believe it will likely feel like a jolt. Fasten your seatbelts for what we expect will be a bumpy ride now and a big bounce later."
What these experts are saying is that in 2012, anything could happen. It still depends on who does what, when, where and how. I have a feeling that we are in for a few surprises, not all of them pleasant. In any case, we wish you a happy, healthy and prosperous 2012.
