IN FINANCIAL terms, 2011 has been tough – unless you happen to be a FTSE 100 director enjoying an average 49% increase in pay and benefits. So what about the prospects for the economy in 2012?
In last year’s Financial Director review of the economy, Geraint Johnes, professor of economics at Lancaster University Management School, predicted 1% UK growth in 2011. He’s even less optimistic about 2012.
“The prospects for growth in the UK economy over the next 12 months are bleak, and the likelihood is that the economy will return to recession,” he says. “The hope that private sector job creation would make good the loss of employment in the public sector is unlikely to be fulfilled, partly because of the squeeze in domestic demand caused by the austerity measures in this country, but partly because of the falling demand from abroad. Among the UK’s trading partners, slow growth in some, and contraction in others, will continue to make life difficult for exporters.”
Thomas Kirchmaier, lecturer in business economics and strategy at Manchester Business School, predicted growth oscillating around zero for 2011. For 2012, he says the growth prospects for the UK, and more generally Europe, will be anaemic at best.
“The financial crisis, severe austerity measures and generally slow growth will have an impact on economic activity,” Kirchmaier says. “Having said that, the US has a presidential election, which typically implies higher spending, looser monetary policy, and better growth prospects.”
The view from an FD’s office is also subdued.
“Prospects for growth in Europe in 2012 will be very challenging,” says Eric Hutchinson, FD at Spirent Communications, a networking technology company. “Given the macroeconomic uncertainties and insipid consumer demand, only the very brave will be investing for growth. This, in turn, will exacerbate the negative trends.”
So will quantitative easing (QE) aid the gloomy growth prospect? “With interest rates at virtually zero, the lowest in the history of the Bank of England, and the government set fast on austerity measures, QE is virtually the only tool left in the box to use,” says Robin Gowers, senior lecturer in economics at Anglia Ruskin University.
He points out that the Bank of England claimed the first £200bn round of QE added between 1.5% and 2% to economic growth. On that basis, the current round of QE could add 0.5% to 2012’s growth. Gowers says: “The policy makers steering the ship are expecting too much of QE – fiscal measures need to be taken.”
However, Kirchmaier says he is doubtful whether QE will make much difference to 2012’s economic growth.
Going for growth
Surely, resolving Europe’s sovereign debt crisis is the key to unlocking more growth?
“The sovereign debt crisis in Europe has become a major threat to the real economy,” says Johnes. “The European institutions have failed to resolve the issues. If an orderly exit of some economies from the euro cannot be negotiated, then fiscal integration that goes substantially beyond the existing proposals is needed.
“The alternative is a horrible domino effect of serial default through much of the continent – following that, the investment needed to kick-start recovery will not be forthcoming, and we can look forward to decades of stagnation.”
The problem is volatile, changing from day to day. But much hinges on solving the Greek problems – and that remains problematic.
“Even with a 50% write down of its debt, Greece is still looking at national debt equal to 120% of its GDP in 2020,” says Gowers. “Other countries like Ireland, Portugal and Spain, will come under pressure from voters to ask for debt reduction rather than face years of harsh austerity measures.
“All of these countries have to grow to get out of their downward debt spiral. With continued austerity measures and an EU/global economic slowdown, I find it hard to see where growth will come from to help them out of their predicaments.”
So will the euro area start to break up in 2012? “The euro ought to survive because, from a European perspective, it is the best option in a long list of very difficult and more costly choices for EU countries,” says Stephen Gallo, head of market analysis at Schneider Foreign Exchange. He points out that without the euro every country and trading partner would attempt to devalue its own currencies simultaneously in order to gain competitiveness over its neighbours.
He adds: “Moreover, the single currency completes the single market – and the single market is what keeps European businesses efficient. It’s what keeps them productive, it’s what triggers investment and it’s what keeps people employed.”
Richard Driver, an analyst at Caxton FX, says: “The key factor that will continue to support the euro into the next year and beyond is the determination of Asian sovereigns to diversify away from the dollar. However, this will only serve to compound the issues facing the dollar.”
And what about that other ogre – inflation? The Bank of England predicts that inflation will fall sharply in 2012. Kirchmaier agrees. “I follow the opinion of the Bank of England – I think it is realistic.”
Johnes also sees the ogre being slain. “Prices rose by more than 5% in the year up to September, but there is little evidence of this turning into a wage-price spiral of inflation,” he says. “Indeed, the labour market looks increasingly weak and I expect the rate of inflation to fall markedly over the coming months.”
But Gowers sees an “inflationary cloud” on the horizon.
“The continued depreciation of the pound makes imported goods more expensive,” he says. “If inflation does indeed remain high, it will not just be workers suffering declines in real wages that we need to worry about, but also the general competitiveness of the economy going forward.”
So what prospect for the pound, the euro and the dollar in 2012?
“Despite the area’s problems, the euro has held up remarkably well so far and is only forecast to fall to 1.34% against the US dollar next year,” says Chris Redfern, a senior dealer at Moneycorp.
“The plight of the pound will be determined by Europe to a large extent, as the euro is intrinsically linked to sterling right now. If the UK can avoid a double-dip recession and muzzle rising inflation, the pound will slowly start to strengthen. However, the biggest threat to sterling comes from Europe – if the European debt crisis isn’t resolved and the euro weakens, so will the pound.
“The US dollar’s prospects also depend on the outcome across the pond. Should the problems engulfing Europe worsen, investors will turn to safe haven currencies such as the US dollar, despite the fact America has its own problems of a huge budget deficit, sluggish economic growth and a lack of job creation,” Redfern adds.
So another tough year in 2012? The prospect for corporate insolvencies in 2012 look gloomy indeed, says Steve Frobisher, a business turnaround expert at PA Consulting Group.
“Depressed demand in the economy and negative data from all sectors mean that only those sectors or businesses that have genuinely geared their offerings to a highly value-conscious customer will be, to some extent, immune from the icy economic blast sweeping the world,” says Frobisher.
But Ken Scott, with his people-focused experience as chief executive of learning provider ILX Group, sees a route to salvation for harassed FDs.
“The key to survival in business is to have employees fully engaged with the financial strategy so the entire workforce is striving to attain the common goal of cost-savings, effective cash-flow management and increased profits,” he says. “Business leaders should consider training their staff to boost their financial literacy to support this.” ?
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