Any 2012 outlook you read these days (and there are plenty) will tell you pretty much the same thing: it all hinges on Europe.
“A break-up could trigger another great depression. There can be no doubt that policymakers now recognize this risk,” economists Stephen King, Karen Ward and Madhur Jha with HSBC Global Research, said in their 2012 outlook. “That is good news. However, despite signs of greater urgency to deal with the problem, investors remain mostly unconvinced.”
The parallels between the present crisis and the one in 2008, when the “wheels came off the global economy” the first time, concern the group. Forecasters failed to recognize the warning signs until it was too late, and the same may be true this time, they said.
“There are still plenty of downside risks, even assuming the euro’s survival,” they said.
HSBC forecasts weak global GDP growth of 1.9%, weakest since 2009 when the global economy contracted. This includes a stagnant 0.6% for the developed world while the emerging markets are expected to post a comparatively stronger 5.3% advance.
The global economic outlook, such as it is, still faces three major risks.
The first is what the economists call the financial system’s “black box”: the mysterious relationships between financial concepts such as interest rates, bond yields, credit spreads, quantitative easing and fiscal policy.
If, as in 2008, the entire financial system itself is vulnerable, then the already nebulous (at the best of times) connections between these disparate concepts will begin to morph and react in unpredictable and damaging ways.
“If investors continue to hunt for safety, stuffing money under the proverbial mattress, a major credit crunch could result,” they said.
Speaking of interconnectedness, the risks of global contagion have also increased. Many countries in Asia, Latin America and parts of Europe will be vulnerable as European banks sell off assets and pull their funds home in a bid to shore up their own bottom lines.
The biggest concern, however, is the seemingly continued and tortured paralysis among policymakers in both the European Union and the United States. Certainly, any market observer will agree that equities in 2011 have risen and fallen on every missive coming out of Capitol Hill or E.U. crisis meeting.
“The ‘madness of crowds’ is an all-too-familiar problem, which is typically dealt with through strong policy actions,” they said.
Problem is, much of the ammunition available to policymakers — interest rates, budget deficits, quantitative easing — was spent in 2008. This time, options are more limited.
And in the eurozone, the popular opinion now with fiscal austerity at hand and sovereign debts at critical levels, is for policymakers to finally confront the fundamental flaws at the foundation of the European Union.
“Eurozone policymakers recognize the scale of the problem but their struggles towards a solution are set to continue well into 2012,” the report said.
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