Saturday, 14 January 2012
Will Europe Show the World's Largest Economy How Deep the Rabbit-Hole Goes? What about “Occupy Wall Street”? Only 2012 Will Tell!
As this year nears to an end, the world’s leading economy is set to knock out a new start; a fresh start perhaps, following a full-throttled year, featured with a series of economic and political events in addition to the latest developments from around the globe. A year ago, four Arab regimes were ousted by the uprising that rocked the Middle East and North Africa, and surprisingly reached Wall Street. Also a year ago, some of the large economies were slammed by the escalating debt woes, especially the 17-bloc euro area economies, as policy makers struggled to contain the region’s debt crisis, while economic forecasts were rather optimistic over the U.S economy. Before 2012 started, projections suggested the U.S economy will overcome its worst financial crash, carry out economic advancement and build up strong economic momentum on the long-run amid the present aftermath of the worst recession since the Great Depression and the obstacles that have been hampering the desired economic rebound. Based on last year’s performance of the U.S economy, it was concluded that the recession was worse than forecasted. However, the U.S economy continued to recover gradually but at a rather slower pace. All expectations for the year 2012 are to be good year, economically, and certainly better than 2011. Expectations for year 2012 point that the U.S economic recovery and rebound will be fulfilled. In addition, it is expected that the greater risks of inflation or recession will tick lower. On the other hand, more expectations suggest that the euro zone would fall into recession this time, while the U.S recovery process would tend to be moderate. Now, will the U.S economy meet our good expectations in 2012? Only time will tell... Housing, Manufacturing, and Services are yet to reach full stability! Being the sector that basically triggered the worst financial crisis since the WWII; the housing sector will be our kick off to foresee. The U.S housing sector unfortunately couldn’t carry out a stable rebound throughout the year 2011, but instead, the Federal Reserve said repeatedly that the housing market continued to show weak improvement, grew within disappointing levels amid the big challenges, which persisted and weighed on the housing recovery, such as elevated unemployment in the U.S, tightened credit standards, and not to mention record high foreclosures, together stripped the housing sector from its reaching stability in the past year. The U.S housing market continues to battle for full stability, like the rest of the sectors in the U.S economy amid the major dilemmas that stand before the economic recovery, while adding to these major obstacles, the U.S mounting debt burden along with the stretched budget deficit, have definitely let the world’s biggest economy to lose its top-notch AAA credit rating for the first time since 1917. A similar situation can be sited in the Manufacturing and Services sectors, as business growth in both sectors stalled mostly in the past year, where manufacturing activities contracted in the third quarter, signaling that the weakness of global demand could be highlighted once again in the upcoming year, as the current debt crisis in Europe continues to dominate the global scene in general with basically the increasing likelihood of a recession in the euro zone area. Though the Fed believed the U.S needs no stimulus right now and maintained the extension on average maturities of securities holdings along with its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities, together helped the Feds meet its pledge to keep the benchmark interest rates near its historical lows between 0.00 percent and 0.25 percent mostly until mid 2013 to bolster economic growth in the U.S. Few Members were divided many times over policy decisions in the year ago, as some members still believe the U.S economy needs a third round of quantitative easing to support its recovery. On the other hand, most of Feds saw additional stimulus could eventually create another crisis in the future and flame out inflation rates on the long run, but most importantly, stimuli-seekers believed the economy gained more momentum on the long-term. IMF and OECD Outlook The International Monetary Fund affirmed in its latest statement in 2011 that the global economy stepped into a new level of uncertainty in light of the European debt turmoil and the major weakness in overall economic activities around the world, propelling many organizations and economic agencies to lower the 2012 expectations for the U.S and the euro zone economies particularly. According to the latest projections, the IMF expects the U.S economy will grow 1.8 percent in 2012, unlike the projections that were delivered in mid 2011, where the IMF saw that the U.S economy will expand by 2.7 percent in the next year. The IMF also signaled its current projections address the recent economic weakness as we mentioned earlier, in addition to growing concerns on the European debt crisis, where the IMF expects Europe will fail to contain its debt crisis amid the increasing uncertainty over Greece and ongoing projections that Greece may fall into the spiral of bankruptcy, which could heavily threaten Europe’s fiscal stability. In return, the IMF confirmed that policy makers in the U.S and Europe should take credible measures to reduce their stretched budget deficits, besides; the IMF emphasized that great responsibilities rest within the hands of EU leaders to secure sufficient capital for European banks in order to withstand the current debt woes. Separately, the Organization of Economic Co-operation and Development expects the U.S economy will expand by 2.0 percent, while the organization expressed its doubts whether the euro area could possibly withstand its debt crisis in 2012, yet described the European debt crisis as the key solution for the global economy at this phase, pointing that the OECD kept the door opened to adjust its projections if Europe’s debt crisis worsened. Greenback and 2012… Better Economic Momentum, Higher Gains The Greenback fluctuated noticeably during 2011, but was able to build up momentum in late 2011, due to the continuing debt crisis in the euro area, in addition to economic reports from the U.S released towards the end of 2011, while projections indicate that the U.S. dollar will maintain its strength in the upcoming year amid the ongoing improvement that is expected to surface 2012, on the other hand, the outlook for the other major economies around the world and particularly the economies of the euro area is somewhat weak, so the dollar will be the lucky winner among lower-yielding currencies. Bearing in mind, the European economy is still in constant struggle with its overweighed debt burden, adding to signs that Europe will most likely go into recession in 2012, knowing that the European debt crisis forced many of the major European countries such as Italy to endorse austerity measures in order to cut its budget deficit. Therefore, we expect the dollar will pick up and add gains versus other major currencies in the following year, though we cannot take that for granted, however, these expectations were build on several projections from around the global economy, looking with one eye and taking into consideration the pace of economic progress, but now, the U.S dollar is likely to rise strongly over the course of next year. Performance of Companies and Stocks in the U.S, Continuous Improvement U.S stocks maintained profits throughout the year 2011, but revenues were somewhat weak, accordingly, stock markets could act based on two different scenarios in the coming year: The first scenario indicates the U.S economy could be facing a bearish wave during next year, as our projections suggest the financials will get slapped hard following the impact of the ongoing debt turmoil that erupted around the global economy, where we can basically see the U.S financial shares are mostly likely to plunge following declines in European lenders. The second scenario suggests that traders will seek American banks as an alternative for European lenders because of the European debt crisis, which could support stock markets and Wall Street will tend to gain strongly, pointing that this scenario is expected in the second half of 2012. We tend to believe that U.S stocks will trend to the downside in 2012, as the debt crisis will limit corporate profits next year and hit the global economy in general. We should keep in mind, U.S stocks could see an upside movement on the short run next year, unfortunately, the upside movement is not likely to last, but technically considered as a correctional movement unless the Federal Reserve intervenes and activates a third round of quantitative easing, which could bolster the stocks markets big time. U.S Year ahead: Inflation Subdued, Gradual Ease in Unemployment Rate and Moderate Growth Rate The Fed is feeling comfortable regarding the inflation and unemployment situations in the U.S, yet caution is a must while mentioning the labor market though the Fed said unemployment rates are to ease gradually in 2012, while inflation rates continue to be will under control by the Fed. We must note that the employment sector showed early last year an unexpected lag in progress, as policy makers said the economy was healing from the recession at level below those forecasted early in 2011, but the labor market was able to show good signs of recovery in the last few months of 2011, noting that the U.S. labor sector is the key to the solution in the U.S. economy, while growth in other sectors is reflected strongly positively on the employment sector. It is likely that the labor sector will see a modest recovery during next year, because of the recession that is expected in Europe, which will be reflected negatively on U.S. banks and companies that opted to cut on new hiring costs. The U.S. labor sector will certainly face many ups and downs over the next year as it struggles to seek a safe bay. So the U.S. labor market needs few years before it reaches full stability, given the fact that the U.S. economy had lost more than eight million jobs during the financial crisis that hit the whole world, while the latest jobs report released in the past year showed that 120 thousand jobs were added to the nonfarm payrolls in November, but we do not believe that employment growth in the next year will be strong enough to support the U.S. economy strongly. The Fed sees the levels of unemployment in the year 2012 will have a central tendency of 8.5 percent to 8.7 percent, while unemployment rates will need a few years to ease from its record highs to probably range between 6.8 percent and 7.7 percent in late 2014. In general, we expect that the sector will continue to show signs of improvement during 2012, but for accuracy, we do not expect that the sector will witness strong growth before the start of the second half of 2012 amid the continuing crisis in the Europe as mentioned above, which will reflect negatively on the economic conditions in the United States. The future of inflation is still a major concern for financial markets, although we have seen downside risks of inflation in the United States early last year, but apparently those risks reversed to the upside following revolutions in the Arab world also known as the “Arab Spring” including the revolution in Libya, which was capped with the death of Libyan leader Muammar Gaddafi and led the wild hikes in oil prices, but high upside risks of inflation fell back after the political and geographical turmoil eased in North Africa. Most importantly, the Feds said repeatedly in late 2011 that inflation will be well controlled during the next two years, as the last projections announced by the Feds signaled that core inflation will rise between 1.5 percent and 2.0 percent next year. Generally, if the U.S. economy continues to improve next year, it will probably trigger high price levels in the country in the long run, but now, the blurred outlook of Europe’s debt crisis reflects the likelihood of the region falling into the slump of recession, noting that the optimistic scenario indicates that the U.S. economy will start to gain strong momentum in the second half of next year, which means that the Feds have a lot of time to deal with the increasing inflationary pressures, although the Fed stated on several occasions that it has the tools necessary to support the U.S. economy when needed. Growth-wise, the Fed has confirmed during November of 2011 that the U.S. economy will be able to grow at a rate that ranges between 2.5 percent and 2.9 percent in 2012; anyhow, a quarterly economic rebound is not enough to affirm the economic recovery is gaining stronger momentum. Now, the U.S economy depends on what will happen in Europe and whether unemployment will ease noticeably, otherwise, the U.S economy will definitely struggle for a longer period. Fed Keeps Rates Intact and Proclaims to have Appropriate Tools to Stimulate the Economy… “If Needed”! Turning back to the Federal reserve, which is primarily responsible for monetary policy in the United States of America, noting that the Fed had already used two rounds of quantitative easing to support the U.S. economy over the last two years, and completed the second round June 2011, but fears persist that the Feds will activate a third round of quantitative easing amid concerns of sluggish growth, due to the fact that it will create a crisis in the long run and fuel inflationary pressures. However, the Fed opted for another plan to support the economy, where the Fed sought to re-balance its portfolio of the U.S. Federal bonds in favor of long-term bonds, which is known as "Operation Twist", as this program is designed to keep the long-term interest rates in the country within the recent historical lows, while the Bank also pledged to keep the benchmark interest rates at an exceptionally low levels between 0.00 and 0.25 percent until mid-2013 to support economic growth in the country. And therefore we do not believe that the Feds will raise key interest rates in the country during the year 2012, as the core belief that the Feds will continue to facilitate its monetary policy over the course of next year, when talking about interest rates at the very least, but the European debt crisis could force the Fed to foster new programs to stimulate the U.S. economy, given that the impact of the European debt crisis on the U.S. economy proves to be deep. Therefore, initiating a third round of quantitative easing totally depends on the framework that the EU leaders are struggling to reach in order to prevent the debt crisis from getting worse, but expectations suggest that the Fed will adopt a new package of quantitative easing in the first half of 2012, as the Feds repeatedly emphasized late last year that they have the “appropriate” tools to support the U.S. economy if needed. U.S Budget deficit… Spending Cuts vs. Rating Downgrade In this context, last year we all witnessed a huge surprise, after the U.S budget deficit jumped to highest level ever amid its mounting debt burden, which basically made the United States of America lose its top-notch triple-A rating for the first time since 1917. Decision makers in the U.S were forced to undertake strong measures to lift up the debt ceiling by $2.4 trillion dollars, from $14.3 trillion to reach around $16 trillion, sparking a wave of concerns about the U.S. debt outlook. Thus, concerns about the outlook of the fiscal health of the United States will continue to rise in the near future, especially if they the U.S. government sought to provide more support to the economy through additional stimulus plan including President Barack Obama’s late 2010 plan to extend the unemployment benefits program and the tax exemptions program passed by former President George W. Bush. We must note that the extension of the tax breaks program had cost the U.S government between $500 billion to $700 billion in lost tax revenues, while President Barack Obama’s administration reiterated they will begin to cut spending in 2012, while maintaining the investments that will support economic growth, in an effort to reduce the budget deficit and avoid further credit downgrades, since all of the credit rating agencies recently confirmed that the outlook for the U.S. economy and its debt has become "negative." We should expect to see more rattles between members of both the Democratic and Republican parties on the approval of a plan to reduce the budget deficit in light of the different criteria that the two parties are seeking, as Democrats want to raise taxes on the rich, while the Republicans oppose such a plan, since raising taxes on the rich will be considered as a victory for President Obama, which will boost his chances of getting reelected for a second term at the White House, otherwise we should embrace ourselves for a Republican president. Conclusion: Will “Occupy Wall Street” Protests Gain Real Momentum? Before year 2011 started, analysts expected that the U.S economy would recover at a stronger pace. In addition, expectations pointed that the U.S economy would expand on the long run during the second half of 2011, however, the latest developments that affected the U.S economy during 2011 have limited the triggers of the recovery process. Here, we note that in the last year, there were protests in the United States of America under the name "Occupy Wall Street" on the policies of banks, corporations and greed, as those protests used slogans such as "the people want to bring down Wall Street", inspired by the revolutions in the Arab region, and slogans such as "We're the 99 percent of the people", and "Why wealth is limited in the hands of 1 percent of the people?". As the uprising grows, more troubles are set ahead of the economic recovery and the world’s leading economy, while the political spectrum in Washington DC represented by the Democratic and Republican parties that are preparing for the Presidential elections at the end of 2012, featuring the Democrat-backed President Barack Obama versus the Republican-backed President, as Newt Gingrich currently leads the race among Republican candidates. as 2012 beings, American voters will be dominated by the recent progress of the employment sector up to a certain extent, where a considerable improvement in the employment sector would actually boost the chances of President Barack Obama to be reelected for a second term, and vice versa, If weakness in employment sector persists, Republicans will have a better chance to take the lead in the White House. Therefore, We hope that the second half of 2012 will be an appropriate environment for the U.S. economy to restore growth with stronger pace, but it seems the uncertainty will be the dominant theme for most of the major economies in the world during 2012, especially in light of the ongoing challenges that are the U.S economy, which represents nearly 20 percent of the global economy. We hope next year to unfold a better path of growth for years to come, but whether that will be the case or not remains to be seen.