What will 2012 hold for finance professionals in business? A variety of experts offer their predictions in the areas of legislation, the economy, financial management and business trends.
Global Economy
Following the eurozone debt crisis, Charles Davis predicts slow economic growth for 2012.
Dark clouds gathered over the global economy towards the end of 2011, as the eurozone debt crisis rumbled on without any sign of a convincing solution despite several false dawns, changes of government and an increasingly worrying market response. After a remarkably strong recovery from the global recession from mid-2009 through to early 2011, we have since seen the pace of growth slow across the globe, precipitous falls in equity markets and economists rushing to downgrade their forecasts for growth in 2012.
Indeed, the Bank of England (BoE) recently downgraded its forecast for UK growth in 2012 to around 1%, down from 2% in its August projections, and the Office for Budget Responsibility (OBR), the government’s independent forecasting body, dramatically scaled back its growth projection to just 0.7% for 2012. While arguably the Bank and OBR have been behind the curve, there is no doubt that there has been a widespread worsening in sentiment in recent months amid the eurozone imbroglio.
However, there is also a risk that the downward convulsions in market sentiment move us away from fundamentals, from a global perspective. Yes, the eurozone is in a terrible mess and this is a hugely worrying uncertainty hanging over the world economy. But does this necessarily mean the emerging market growth story has disappeared? Don’t several of these increasingly important emerging economies have plenty of fiscal and monetary policy firepower at their disposal if it becomes clear that Western demand is contracting?
My view is that the world economy will expand at a slower rate in 2012 – but the story will vary significantly across the globe. Indeed, as growth slows, there will be scope for policy intervention in economies such as China, India, Brazil and Saudi Arabia that can help to drive domestic demand in these economies as part of the global economic rebalancing.
There is no doubt that 2012 looks like being another tough year for the advanced economies of the West. Across the eurozone, contraction in economic output in the final quarter of 2011 seems likely – and following that a technical recession looks highly possible. While some recent indicators from the US have been slightly better than expected, the world’s largest economy still faces massive challenges – particularly in the shape of how to bring down its massive budget deficit and quell public debt from its current relentless rise. While the fiscal drag from Washington’s attempt to bring down the deficit will act as a brake in the US, the private sector also seems nervous; job creation has significantly underwhelmed in 2011, leaving unemployment around the 9% mark.
All of which makes the UK’s export-led recovery model all the more difficult. The coalition government’s economic strategy has been to focus on reducing the deficit by cutting public expenditure – which had grown significantly in real terms over the last decade – and raising taxes such as VAT. In 2011, some of the impact of this has been felt – inflation was pushed higher by the VAT rise, furthering the squeeze on real household incomes caused by low earnings growth and commodity price rises. In addition, in the second quarter alone, there were 111,000 public sector job losses – vastly higher than those projected by the OBR – contributing to pushing the unemployment rate above 8%. The squeeze on real household incomes has seen real consumer spending decline for four successive quarters and spending was flat in real terms in Q3.
Hence, domestic demand in the UK has been incredibly weak and is unlikely to be a driver of growth in the near term. Given this, the UK’s economic recovery is heavily reliant on business investment and export growth. With around 50% of the UK’s exports going to the imperilled eurozone and business confidence in free-fall – the Q4 ICAEW Business Confidence Monitor showed the largest quarterly decline in confidence on record – these drivers of growth remain significantly impaired. Therefore, we think the UK economy is likely to contract through the final quarter of 2011. Moreover, the big question is whether the government and BoE can do enough to prevent another recession. Whether there are two successive quarters of decline or not, don’t count on the UK economy bouncing back to robust growth in 2012 – it remains a highly uncertain economic outlook.
Legislation and regulation
Prepare for a legislative and regulatory rollercoaster ride, says David Gardner.
Just when we thought 2012 would provide a respite to allow the new regulatory regime to bed in, it turns out we were wrong. The coincidence of some immediate post financial crisis measures having taken longer than anticipated, plus the fresh impetus of the eurozone crisis and the late 2011 slow down in global growth, means that we need to hold tight, fasten our seat belts and be prepared for a regulatory and legislative rollercoaster.
This is an extract from the Finance & Management Magazine, Issue 195, January 2012.
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