Economic predictions for 2012

Throughout 2011, consumers continued to deleverage and businesses held back on spending, on a general erosion of confidence.

What’s in store for 2012? More quantitative easing by the Fed? Soft/hard landing in China? The potential exit of European countries from the EU? How will Canada fair?

Here is some of the research that was recently put out by some of the world’s best strategists.

• Over half of the 53 economists polled by Reuters in early December said they do not expect the Federal Reserve to undertake another round of quantitative easing in 2012, known as "QE3", however 26 did. According to the ones that do expect more action from the central bank, the median estimate stood at $500 billion, mostly of MBSs. For the record, the Fed has already purchased more than $2 trillion of securities since 2008.

• Primary dealers that do business directly with the Fed, including the selling of bonds that the central bank wants to buy expect the Fed to undertake another major economic stimulus program.

• The economic team at Allianz says, “There is still an unusually high level of uneasiness about where the economy is headed. As things stand at present, there is no doubt that the downside risks to the global economy have the upper hand. Resolute economic policy action will play a key role in helping to ensure that the global economy continues on the path to recovery. Given the increasing ties between economies over the years, there is also a pressing need for greater international political coordination both between, and within, the world's major economic regions in general”.

• RBC’s economic minds think that “The risks to the global economy are many; however, with commodity prices staying historically high, US demand recovering, and the Bank of Canada working to insulate the economy from the events in Europe by keeping policy accommodative, real GDP growth is forecasted at a 2.5% clip in 2012”.

• Again the folks at Morgan Stanley have “raised their equities weighting to 10% above benchmark and reduce our cash weighting to zero. This is the first time we have been this overweight equities since October 2008. Our key themes include: 1) EM equity outperformance vs. DM to resume; 2) prefer mega-caps to the rest of the market; 3) dividend yield and dividend growth; 4) quality in the form of our Best Business Models; 5) Asia to outperform EMEA; and 6) gold mining exposure.

• On global economic growth, TD economics “Downgraded the 2012 global economic growth forecast to 2.5%, which represents a 0.7% decline from the September forecast” TD says that “A renewed recession in the euro zone and slower emerging market growth are the main drivers of this downgrade. TD also expects “Greece to likely default within the next six months, forcing European leaders and the ECB to act extraordinarily to avert a full scale banking crisis and the potential default of other sovereigns.

• At Credit Suisse, Global Equity Strategist Andrew Garthwaite “sees the S&P 500 ending 2012 at 1,340, reiterating a call made earlier this year. This assumes EPS of $96, which reflects no year-over-year growth”. In addition, Mr. Garthwaite and his team “upgraded US corporate bonds to overweight but remain underweight conventional bonds and did move cash to underweight (from overweight). They also remain overweight Gold”.

• Goldman Sachs predicts Brent crude will average $120 per barrel in 2012. The bank's optimism is outdone only by CIBC ($123).

• Professor Nouriel Roubini assigns a probability of at least a 50% of a breakup of the euro zone in the next 2-to-3 years, which would in his words almost certainly “lead to a fast-motion train wreck”.

• At Scotia Bank, the currency team thinks that “The USD remains relatively firm versus major peer currencies despite sluggish economic growth, fiscal adjustment needs and persistently high unemployment. However, a resumption of positive flows should allow the CAD to reach parity with the USD in the first half of 2012”.

• Canada’s housing market shows the “classic signs of over valuation, speculation and over supply,” said analysts at Bank of America Merrill Lynch but that’s no reason to think that there will be an epic crash of American proportions. The bank’s Canadian analysts added that record Canadian household debt and increased joblessness are cause for concern over the next year. The team expects fewer sales, and a 5% slip in prices in 2012.

• In my opinion, no important decisions will be made in the U.S. with regards to the deficit question before the upcoming elections in November. As for Europe, small steps are taken to find solutions for sovereign debt issues but evolution is very slow. For those reasons, I believe that markets will end the year on a positive note but will be marked with a lot of volatility and a slow progression.

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