Another Year of Uncertainty; Expected Weakness in the First Half and a Rebound in the Second Half

Introduction 
After a tumultuous year in 2011 full of ups and downs and mixed sentiments, the U.K. economy may witness another year of uncertainty and turbulences as all signs indicate the British economy is not out of the woods yet. The U.K. economy witnessed a slowdown in growth pace along with high unemployment and inflation rates due to many factors led by the strong austerity measures adopted to lower the huge budget deficit. Other factors that yielded in the drop in consumer spending and contraction in the economy's major sectors were the crystal clear slowdown in major economies, most notably in the U.S., on the back of the sharp spending cuts and monetary tightening, the escalating European debt crisis, some natural crisis in some Asian economies and political changes in some countries. With further expected austerity measures by the British government to meet its budget shortfall targets, some time for major economies to recover from the imbalances of the 2008 financial crisis and unease in the European debt dilemma due to the political frictions, indecision and spread of debt contagion from one county to another, including large economies, seen clearly in the significant rise in borrowing cost at bond auctions, the U.K. is likely to face a shaky and uncertain macroeconomic prospects in 2012. A) Growth The British growth eased to 0.0% in the second quarter of 2011 form 0.4% in the first quarter while rebounded to 0.6% in the third quarter yet may drop again in the fourth quarter as seen by the latest data released by the U.K. economy. The major factors that affected growth were the strong austerity measures adopted by the government, global slowdown and the elevating European debt woes. In 2012, the outlook, as announced by many U.K. officials, refers to a downside revision in growth prospects. The BoE in its latest growth projections referred to an average 1% growth in 2012 from the previous estimates of 2%, clarifying that the U.K. economy will be under pressure from the euro zone debt crisis. BoE Deputy Charles Bean said the U.K. will face a difficult year in 2012, yet he still believes "some return to growth" in the second half as inflation slowdown will boost consumer spending. The Office of Budget Responsibility (OBR), the independent body that announces forecasts for the economy, also slashed its growth estimates to 0.7% in 2012 from the previously forecasted 2.5%. It said there is a 1-in-3 chance the British economy could experience a recession. Moreover, the OECD said the British economy will record an annual growth of 0.5% in 2012 from preceding estimates of 1.8%, where exports and household consumption are expected to recover, yet it mentioned the U.K. is heading toward a double dip recession in six-month time, while the IMF expects 1.6% expansion. B) Unemployment Due to the deep austerity measures and sluggish growth, the jobless rate remained high throughout the year, ranging between 7.9% and 8.0%, yet it rose further by the end of 2011 reaching 17-year high at 8.3% in the three months ended October, according to the ILO unemployment gauge. With the sluggish growth rate and decline in consumer spending, many companies cut jobs to lower their costs. The OBR predicts the rate to rise to 8.7% from the previously expected drop to 7.4%. The OECD also expect further rise in jobless rate to 8.8% in 2012. C) Public Debt Following the large spending by the British government in 2010 to boost the economy, the government found itself highly indebted which prompted it to launch strong austerity measures in 2011, including large spending cuts and rise in taxes. The latest budget deficit data showed that the shortfall narrowed in November. Net borrowing excluding support for banks retreated to 18.1 billion pounds compared with 20.4 billion pounds deficit a year earlier as the tax revenue advanced 7.1% while spending increased 0.8% from 0.5%, yet net debt jumped to 977 billion pounds, or 62.8% of gross domestic product. The drop in deficit remained slow in 2011 due to sluggish growth that resulted in lower tax receipts. The OBR expects the deficit to gradually decline to 53 billion pounds by 2015-2016 from 120 billion pounds in 2012-2013, where the structural budget deficit will reach 4.6% of GDP in 2011 while will record a surplus within five-year term, yet next year it seems that the government will miss its targets for deficit reduction as it will spend more than 48 billion pounds on debt interest payments in 2012, while has to borrow an extra 158 billion pounds over the next five years. The OECD expects the government debt to rise in 2012, where the IMF said the deficit will reach 7% of GDP. D) Inflation Throughout 2011, inflation has remained above the BoE's upper limit of 3% where the rate ranged from 4% to 4.5% till August, reaching its peak of 5.2% in September. In October and November, the rate decelerated to 5.0% and 4.8% respectively. With the expected spending cuts, weak growth and high unemployment in 2012, inflation is likely to recede. The BoE's latest inflation outlook refers to a sharp fall in the rate over 2012 as factors keeping inflation above the target which are the increase in the VAT from 17.5% to 20% at the beginning of 2011, previous depreciation of the pound and the rise in import and energy prices will face downward pressure from the slack in labor market and the spare economic capacity. Policy makers expect the rate to slow to below the 2% by late 2012. Also, the IMF said Britain's inflation will stand at 2.4% in 2012. II- Market Response A) The Sterling The cable took a downside trend versus the euro in the first six months of 2011, yet it managed to rebound in the second half as the escalating European debt crisis weighed on the euro. In 2012, the pound is predicted to show some advance against the 17-nation currency as the debt crisis is expected to take more effect. Against the U.S. dollar, the sterling advanced in the first half where it started to fall in the second half as the safe haven characteristic of the dollar gave it a privilege amid the turbulence in markets on the back of the debt woes and sluggish global growth. In 2012, the situation in the U.S. seems to be much better than the U.K. along with the refuge merit of the dollar which suggest further decline for the pound versus the green currency at least in the first half of the year. B) FTSE The FTSE showed bearishness with some rebound attempts in 2011 as it was affected by the uncertain outlook for the British economy, swelling European debt woes, slowdown in global demand and downbeat earnings by large European companies. For 2012, further uncertainty is predicted to prevail with the inability of European leaders to ease the debt crisis. Thus, the FTSE is predicted to undertake a track similar to the 2011, characterized by more bearishness and rebound attempts. III- BoE Action According to the aforesaid developments seen throughout 2011, the BoE kept interest rate low at 0.50% for the whole year to spur growth while decided to add 75 billion pounds to the Asset Purchase Facility (APF), to reach a total of 275 billon pounds in October 2011, for the first time since 2009. The action was taken after the latest data showed a significant slowdown signs which sparked concerns the U.K. is heading towards another recession. However, policy makers split as the high inflation rate -which remained above the target for the whole year- coincided with slow growth and accordingly caused some to call for raising interest rate to contain inflation while others asked for expanding the APF more to boost the economy. A) Interest rate In accordance with the expected severe spending reductions, slow growth and high unemployment, the BoE is likely to keep the borrowing cost unchanged at its low level of 0.50% to boost the economy, where if policy makers decided to raise interest rate this will probably be in the end 2012. Another reason that makes leaving interest rate an inevitable action by the bank is that inflation rate which is predicted to retreat gradually, yet will remain above the 2% target all over the year. Thus, there will be no pressure on the bank to raise interest rate as shoring up growth will be a higher priority. B) APF Further expansion in stimulus is expected at the beginning of the year, probably in February or shortly after, where another 50 billion pounds could be added, to see the impact of the program, launched in October, which will end in February, and with the release of the February's inflation report that will include the latest growth and inflation forecasts. Some BoE policy makers said there may be a need for more stimuli due to the high threats posed from euro area neighbors. Bean said the BoE will add to stimulus in February with the end of the program, if necessary. Policy maker Spencer Dale said with the likelihood that inflation would come below the 2% by late 2012; there are higher chances of expanding the bond purchases. The OECD mentioned that the BoE has to add to non-standard measures by 125 billion pounds in 2012, where the money printing process may take part in early 2012, as the economy is predicted to record contraction in the first half of the year. All in all, the outlook for the British economy is predicted to be dominated by uncertainty and likely to be affected by the latest developments in the euro area debt crisis. There is higher probability to see a slowdown and may be contraction in the first half of the year due to the debt crisis and strong spending cuts while a rebound in the second half is inevitable as the decline in inflation will bolster consumer spending, where the public debt will remain high. Consequently, the BoE is estimated to keep interest rate steady at its low level to spur recovery while adding to stimulus early in the year to stimulate the economy, especially amid expectations of deceleration in prices.
A)     Growth

The British growth eased to 0.0% in the second quarter of 2011 form 0.4% in the first quarter while rebounded to 0.6% in the third quarter yet may drop again in the fourth quarter as seen by the latest data released by the U.K. economy. The major factors that affected growth were the strong austerity measures adopted by the government, global slowdown and the elevating European debt woes.

In 2012, the outlook, as announced by many U.K. officials, refers to a downside revision in growth prospects. The BoE in its latest growth projections referred to an average 1% growth in 2012 from the previous estimates of 2%, clarifying that the U.K. economy will be under pressure from the euro zone debt crisis. BoE Deputy Charles Bean said the U.K. will face a difficult year in 2012, yet he still believes "some return to growth" in the second half as inflation slowdown will boost consumer spending.  

The Office of Budget Responsibility (OBR), the independent body that announces forecasts for the economy, also slashed its growth estimates to 0.7% in 2012 from the previously forecasted 2.5%. It said there is a 1-in-3 chance the British economy could experience a recession. 

Moreover, the OECD said the British economy will record an annual growth of 0.5% in 2012 from preceding estimates of 1.8%, where exports and household consumption are expected to recover, yet it mentioned the U.K. is heading toward a double dip recession in six-month time, while the IMF expects 1.6% expansion.

 

B)     Unemployment 

Due to the deep austerity measures and sluggish growth, the jobless rate remained high throughout the year, ranging between 7.9% and 8.0%, yet it rose further by the end of 2011 reaching 17-year high at 8.3% in the three months ended October, according to the ILO unemployment gauge. With the sluggish growth rate and decline in consumer spending, many companies cut jobs to lower their costs. 

The OBR predicts the rate to rise to 8.7% from the previously expected drop to 7.4%. The OECD also expect further rise in jobless rate to 8.8% in 2012.

C)     Public Debt

Following the large spending by the British government in 2010 to boost the economy, the government found itself highly indebted which prompted it to launch strong austerity measures in 2011, including large spending cuts and rise in taxes.  

The latest budget deficit data showed that the shortfall narrowed in November.  Net borrowing excluding support for banks retreated to 18.1 billion pounds compared with 20.4 billion pounds deficit a year earlier as the tax revenue advanced 7.1% while spending increased 0.8% from 0.5%, yet net debt jumped to 977 billion pounds, or 62.8% of gross domestic product. The drop in deficit remained slow in 2011 due to sluggish growth that resulted in lower tax receipts.

The OBR expects the deficit to gradually decline to 53 billion pounds by 2015-2016 from 120 billion pounds in 2012-2013, where the structural budget deficit will reach 4.6% of GDP in 2011 while will record a surplus within five-year term, yet next year it seems that the government will miss its targets for deficit reduction as it will spend more than 48 billion pounds on debt interest payments in 2012, while has to borrow an extra 158 billion pounds over the next five years.

The OECD expects the government debt to rise in 2012, where the IMF said the deficit will reach 7% of GDP. 

D)     Inflation

Throughout 2011, inflation has remained above the BoE's upper limit of 3% where the rate ranged from 4% to 4.5% till August, reaching its peak of 5.2% in September. In October and November, the rate decelerated to 5.0% and 4.8% respectively.

With the expected spending cuts, weak growth and high unemployment in 2012, inflation is likely to recede. 

The BoE's latest inflation outlook refers to a sharp fall in the rate over 2012 as factors keeping inflation above the target which are the increase in the VAT from 17.5% to 20% at the beginning of 2011, previous depreciation of the pound and the rise in import and energy prices will face downward pressure from the slack in labor market and the spare economic capacity. Policy makers expect the rate to slow to below the 2% by late 2012.

Also, the IMF said Britain's inflation will stand at 2.4% in 2012.

II- Market Response

A) The Sterling

The cable took a downside trend versus the euro in the first six months of 2011, yet it managed to rebound in the second half as the escalating European debt crisis weighed on the euro. In 2012, the pound is predicted to show some advance against the 17-nation currency as the debt crisis is expected to take more effect.

Against the U.S. dollar, the sterling advanced in the first half where it started to fall in the second half as the safe haven characteristic of the dollar gave it a privilege amid the turbulence in markets on the back of the debt woes and sluggish global growth. In 2012, the situation in the U.S. seems to be much better than the U.K. along with the refuge merit of the dollar which suggest further decline for the pound versus the green currency at least in the first half of the year.  

B) FTSE

The FTSE showed bearishness with some rebound attempts in 2011 as it was affected by the uncertain outlook for the British economy, swelling European debt woes, slowdown in global demand and downbeat earnings by large European companies. For 2012, further uncertainty is predicted to prevail with the inability of European leaders to ease the debt crisis. Thus, the FTSE is predicted to undertake a track similar to the 2011, characterized by more bearishness and rebound attempts.

III- BoE Action

According to the aforesaid developments seen throughout 2011, the BoE kept interest rate low at 0.50% for the whole year to spur growth while decided to add 75 billion pounds to the Asset Purchase Facility (APF), to reach a total of 275 billon pounds in October 2011, for the first time since 2009. The action was taken after the latest data showed a significant slowdown signs which sparked concerns the U.K. is heading towards another recession. However, policy makers split as the high inflation rate -which remained above the target for the whole year- coincided with slow growth and accordingly caused some to call for raising interest rate to contain inflation while others asked for expanding the APF more to boost the economy.

A) Interest rate

In accordance with the expected severe spending reductions, slow growth and high unemployment, the BoE is likely to keep the borrowing cost unchanged at its low level of 0.50% to boost the economy, where if policy makers decided to raise interest rate this will probably be in the end 2012. Another reason that makes leaving interest rate an inevitable action by the bank is that inflation rate which is predicted to retreat gradually, yet will remain above the 2% target all over the year. Thus, there will be no pressure on the bank to raise interest rate as shoring up growth will be a higher priority.

B) APF

Further expansion in stimulus is expected at the beginning of the year, probably in February or shortly after, where another 50 billion pounds could be added, to see the impact of the program, launched in October, which will end in February, and with the release of the February's inflation report that will include the latest growth and inflation forecasts.

Some BoE policy makers said there may be a need for more stimuli due to the high threats posed from euro area neighbors. Bean said the BoE will add to stimulus in February with the end of the program, if necessary.  Policy maker Spencer Dale said with the likelihood that inflation would come below the 2% by late 2012; there are higher chances of expanding the bond purchases.

The OECD mentioned that the BoE has to add to non-standard measures by 125 billion pounds in 2012, where the money printing process may take part in early 2012, as the economy is predicted to record contraction in the first half of the year.

All in all, the outlook for the British economy is predicted to be dominated by uncertainty and likely to be affected by the latest developments in the euro area debt crisis. There is higher probability to see a slowdown and may be contraction in the first half of the year due to the debt crisis and strong spending cuts while a rebound in the second half is inevitable as the decline in inflation will bolster consumer spending, where the public debt will remain high. Consequently, the BoE is estimated to keep interest rate steady at its low level to spur recovery while adding to stimulus early in the year to stimulate the economy, especially amid expectations of deceleration in prices.  

Print Futuristic Outlook for 2012: The Escalating Debt Crisis, the Worst yet To Come

Focusing On the Major Events in 2011: As 2011 has come to an end Europe continued to suffer from the escalating debt crisis, where European leaders, despite the huge effort made in the past year, failed to control the debt crisis and prevent the contagion from spreading into larger economies, and accordingly the sentiment deteriorated further and the confidence remained fragile. All eyes will be focused on 2012, tracking the implementation of the measures taken in 2011 to heal the debt crisis, especially after the crisis forced growth to slow significantly, the pace of recovery to falter and the euro zone to slip back into a “mild” recession, which eventually threatens the entire monetary union that is currently at risk. In 2011 Greece, Ireland and Portugal were on bailouts, where rising yields on their bonds led those countries to seek financial aid from the European Union and the International Monetary Fund. Portugal and Ireland were able to start to manage with the financial aid provided and signs of progress; however, as the wheel of time kept on turning for Greece that needed another bailout, which also was approved by the European Union and the International Monetary Fund after Papandreou’s government stepped down for Lucas Papademos, the former European Central Bank Vice President took charge with main objectives of obtaining the sixth tranche of 2010’s bailout package in addition to the second aid package, noting that Greece could go through bankruptcy as soon as January without any financial aid. Throughout the past year, we saw Italy and Spain following Greece, Ireland and Portugal’s steps into deep crisis, where despite the strength of these economies, Spain was affected sharply by the escalating debt crisis and weakening global demand, where Spain is suffering from the highest unemployment rate in the euro zone which is currently standing at 20.3%. For Italy, yields on the nation’s securities surged sharply to records after European leaders failed to create a firewall around indebted nations to prevent the debt crisis from threatening the euro-zone third largest economy, which in result led investors to weigh the failure of such large economies and speculate that Italy and Spain will be the next victims of the crisis. In the fourth quarter of 2011, political changes took place in the euro zone, where the Italian Prime Minister, Silvio Berlusconi stepped down, while Mario Monti, the former European Commissioner, took the lead and announced a new technocrat government and accelerated the implementation of austerity after he pledged to lower the current debt-to-GDP ratio of 120%. After the political changes seen in Italy, Spain and Greece the European Summit came to add more concerns to the market after European leaders ruled out the European Central Bank intervention in fighting back the crisis, which didn’t meet market speculation and spread pessimism across the board, as investors saw that the European Central Bank should play a larger role in tackling the crisis. European leaders also agreed in the last summit during 2011 to maximize the contribution of the International Monetary Fund in tackling the debt crisis, where European nations will provide around 200 billion euros to the facility, which in turn will run alongside with the European rescue fund in providing bailouts for European indebted-nations. The summit deal also provided details regarding the European Financial Stability Facility and the European Stability Mechanism, where leaders decided that the temporal facility (EFSF) should continue functioning in 2012 and will run side by side with the permanent facility (ESM) that will be launched in July, where both facilities in addition to the International Monetary Fund will create the so-called “Bazooka”, which is expected to provide further support to European nations to end the two-year debt crisis. On the other hand, the European Central Bank in the last meeting affirmed the leaders’ announcement and reassured that the Bank is not allowed and will not intervene in healing the debt crisis or act as a lender of last resort, where the European treaty prevents the Bank from providing direct funds to governments. Nevertheless, markets are still betting that in case the debt crisis threatens the currency union itself and impairs the transmission of the ECB monetary policies to the financial system and the real economy, the ECB will be forced to act against the treaty. Draghi also assured that the Bank’s focus will remain now on price stability and growth reiterating that the unconventional measures remain temporary in nature. However, the European Central Bank provided other tools to support growth and other nations, where the extraordinary measures included 3-year loans for banks with full allotment in addition to covered bonds and other tools used before the last meeting. The European Central Bank moved four times this year, raising rates two times and then lowering the rates by the same percentage, where the Bank raised rates in April and July by 0.25% to 1.25% and 1.5% respectively as Trichet was the President of the ECB, yet Mario Draghi in the first rate decision agreed with other policy makers to reverse Trichet’s moves after the euro-area nations slipped into “mild recession”. For Germany, the country continued in 2011 to reject the intervention of the European Central Bank and boosting the firepower of the European rescue fund, where Germany is the largest economy in the euro-zone and it will provide the largest portion, thus it will be highly exposed to the debt crisis and the possible failure of the Monetary Union, which in result means that Germany will play all its political cards before allowing the European Central Bank to intervene and act as a lender of last resort. 2011 ended with high volatility and heavy fluctuations in the market, stocks ended the year lower, while the common currency remained fragile and weak, and now our eyes will be focused on Europe and on the worsening debt crisis, where the first half of 2012 will give us indications whether the euro will survive and how European leaders will act and tackle the debt crisis in case they succeeded. 2012 Growth Forecasts for the Euro Area Region: The first half is the difficult half As 2011 came to an end, growth remained weak while the pace of recovery faltered, where the projections provided by major economic institutions in the world confirmed the slowdown in growth. The debt crisis is expected to worsen and deepen further at least during the first half of this year, awaiting European leaders to finalize their decisions and then the implementation of those measures shall decide the stance of growth over the following quarters. Moreover, growth is expected to slow further during this year, especially with the spending cuts and the further austerity applied that is expected to pressure growth further, where European governments are to apply further austerity in order to bring the budget deficit lower and to control the debt in attempts to strengthen the entire euro-area region’s financial position, which in turn could help in fighting the crisis and prevent the contagion from spreading further into other nations within the zone, debt woes spread after Italy and Spain became the main suspects of falling behind and following other weak countries into deep crisis. European nations in the December 9 summit decided to adopt a new intergovernmental treaty, where this treaty forces stricter budget rules on the euro area nations in addition to other non-euro countries that would like to join; however, these countries must at first get the back of their parliaments ahead of joining the euro-area nations in the new treaty, noting that all European nations except the United Kingdom are welling to join, yet further details will be provided with the start of this year as leaders attempt to finalize the decision as soon as possible to start the implementation quickly as time is running out and day by day market tension and volatility are intensifying, and in result the crisis is deepening. The euro area nations with this new treaty and the austerity measures needed to meet those targets are projected to pressure growth further, which in turn forced major economic institution to lower the euro-zone growth forecasts on several occasions during 2011, especially after the downbeat macroeconomic fundamentals, which showed that manufacturing and services sectors contracted in 2011, consumers confidence remained fragile and accordingly spending remained weak. The euro zone grew only 0.2% in the third quarter of 2011, unchanged from the previous quarter, where the slowdown in growth is expected to extend to the fourth quarter with the gross domestic product figures expected in the first quarter of 2012. But in general the European Central Bank foresees the annual real GDP growth in a range between 1.5% and 1.7% in 2011, between -0.4% and 1.0% in 2012 and between 0.3% and 2.3% in 2013. Moving to the Organization for Economic Cooperation and Development (OECD) projections, the organization projects the euro area region to grow by 1.6% in 2011, by 0.2% in 2012 and finally by 1.4% in 2013. The German economy, the largest economy in the euro zone, has weakened to the end of 2011 due to the fragile confidence and the escalating debt crisis in addition to the global slowdown, which hurt the nation’s exports. However, the OECD expects Germany to lead the growth in the euro zone, where the nation is projected to expand 1.8% in 2011, by 4.0% in 2012 and finally by 3.2% in 2013. For the second largest economy in the euro zone, France faces several challenges that are expected to continue affecting the economy in 2012, where rating agencies lowered the outlook for France which will be under review for a possible downgrade after rating agencies explained that expanding the contribution of France in the bailouts provided for nations will stretch the French budget and eventually it will cost France its triple A credit rating and with slowing growth more austerity is also needed to cut the debt and secure the top rating. The OECD projections for France showed that the country could have expanded by 1.6% in 2011, yet growth will slow in 2012 when the country is projected to grow only 0.3%; however, the pace of growth should accelerate again in 2013 as the organization projects the nation to expand 1.4%. Italy could have expanded slightly by 0.7% in 2011 according to the OECD; however, the nation is expected to contract in 2012 by 0.5% as Mario Monti, the new Italian Prime Minister pledged to apply further austerity to reduce the huge debt the country handles, which worth around 2.2 trillion euro, the largest amount of debt and the second highest debt-to-GDP ratio after Greece Spain on the other hand is expected to contract in the fourth quarter of 2011 as the global slowdown, the weakening exports and the surge in unemployment should affect the economy sharply; however, in 2012 the nations is projected to record 0.3% expansion. The International Monetary Fund (IMF) foresees the euro-area region to grow by 1.6% in 2011, yet the pace of growth will slow in 2012 to 1.1%. For Germany, France, Italy and Spain, the largest four economies in the euro zone, the Facility projected them to grow by 1.3%, 1.4%, 0.3% and 1.1% in 2012 respectively. The European Commission also expects the euro-area region to grow only 0.5% in 2012 and by 1.3% in 2013, while the entire European Union, which comprises the 27 European countries, could grow 0.6% and 1.5% in 2012 and 2013 respectively. At last, the World Bank projections for the euro-area region were relatively better than other economic entities, where the Bank projects the euro-area nations to grow 1.7% in 2011, while in 2012 the region is expected to gain 1.8% expansion yet likely to be revised lower as the year starts, at the time the euro zone will likely expand 1.9% in 2013. The Euro Zone 2012 Inflation Projections: Inflationary threats start to ease... In 2011, inflation in the euro area region reached 3.0%, above the European Central Bank target of 2.0%, where the Bank had to offer extra-ordinary measures in order to support growth and banks, which pushed inflation higher. In addition, energy and import prices remained relatively high, which in result added more inflationary pressures on the prices. The European Central Bank took rates back to their lowest on records after two moves that took rates shortly to 1.50%, where the bank had to act against its main mandate, which is maintaining price stability, in order to spur growth which was hurt significantly, affected by the escalating debt crisis and the global slowdown. The European Central Bank expects inflation to remain above the 2.0% target in the coming period, before undershooting the Bank’s target, where the Bank explained that it is essential for the current monetary policy to maintain price stability over the medium-term; however, since inflation is driven by temporary factors and it is projected to decline below the target in the medium-term, the Bank acted in favor of growth in order to prevent the region from slipping back into another phase of Deep Recession as so far the bank says the euro area is entering a “mild recession”. The European Central Bank reported that inflation could have lingered above 2.0% in 2011 in a range between 2.6% and 2.8%, while in 2012 inflation is expected between 1.5% and 2.5%, in the time the Bank projected inflation between 0.8% and 2.2% in 2013. The Euro Zone Monetary Policy Projections: Further Easing is Possible in the First Half, Rates Unlikely below 1.0% Unless the Bank was forced into Quantitative Easing The monetary easing seen in 2011, provided by the European Central Bank, is expected to continue and remain effective in 2012, where the bank adopted unconventional measures and offered banks with loans in order to spur growth and protect the financial sector from the escalating debt crisis. It has also coordinated with other major central banks across the world and provided European Banks with dollar funds and eventually lowered the benchmark rates to 1.0% in attempts to support European leaders’ attempts to end the debt crisis once and for all. The main movements provided by the ECB are explained below. The European Central Bank, the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank in coordination with each other agreed on November 30 to lower the pricing on the temporary U.S. dollar liquidity swap arrangements adopted in another surprise move earlier in the year by 50 basis points so that the new rate will be the U.S. dollar Overnight Index Swap (OIS) rate plus 50 basis points. This pricing will be applied from 5 December 2011. The authorization of these swap arrangements has been extended to 1 February 2013. In addition, the European Central Bank continues to offer three-month tenders until further notice. The Bank also explained in October that the Bank will continue money operations and offered 12 and 13-month loans for banks to support banks recapitalization, while the Bank also provided 40-billion euros program of covered bonds purchases. The European Central Bank (ECB) provided the euro-area banks on December 21 with 3-year loans, in attempts to provide liquidity to the market and prevent a credit crunch and an interbank lending freeze from hurting the financial sector while also eased the collateral rule and cut the reserve requirements. The bank will provide the second 3-year loan tender in February 2012. During 2011, the ECB bought large amount of European indebted bonds in order to ease market tension and control the rapid incline seen on yields, which reached unsustainable levels and raised concerns in the market that soon European indebted nations such as Italy and Spain will not be able to access the capital market and in result will not be able to meet their obligations and commitments and finally both nations will follow Greece, threatening the entire monetary union. However, and despite the large amount of easing provided for European Banks and nations, the debt crisis kept on worsening and growth kept on slowing, which also led the European Central Bank to lower key rates twice in November and December, reversing the former president’s movements of raising rates twice in April and July. In 2012, the monetary policy remains difficult to expect, as the European Central Bank will act in line with the economic events and the debt crisis developments, where in case European leaders were unable to finalize a comprehensive and strong plan to tackle the debt crisis and revive growth, the Bank will intervene then to save the monetary union, but still for now we do not expect any round of quantitative easing or bond purchases at the early stages of 2012. However, in case the European rescue funds, which comprises of the EFSF and the ESM, and the International Monetary Fund failed to quell jitters and stop the debt crisis contagion, the Bank could finally respond to the mounting market pressure and speculation of quantitative easing and bond purchases around the second quarter or mid-year, meaning that the European Central Bank will be forced to act against its mandate and become the lender of last resort. The Euro Zone Unemployment Projections: Unemployment to Remain High amid Further Austerity In 2011, the euro zone unemployment rate climbed above 10.0%, affected by the slowdown in growth and the faltering recovery, and also by the escalating debt crisis, which forced downside pressures on European nations and on the entire globe. We will track the debt crisis effects on rising unemployment now, where the escalating debt crisis as a start led European confidence to drop in the entire Union, and we all know that when consumers loose faith and confidence in the economy they tend to spend less and save more, and in result with less consumption and spending companies’ profits will weaken, which was seen clearly in Europe as the Manufacturing and services sectors contracted sharply in the second half of 2011, and eventually companies will have to cut spending in order to remain strong and avoid bankruptcy, thus employers will be forced to reduce the labor force significantly. Moreover, European governments adopted new austerity measures in order to cut their budget deficits, where with the further austerity expected in to be implemented in 2012 more employees are expected to loose their jobs as governments attempt to cut spending by reducing the operating costs of the public sector. In result, in case the European debt crisis continued to worsen and deepen and European leaders were unable to quell jitters by ending the two-year debt crisis, unemployment is projected to climb above the current rate of %10.3, where the OECD foresees unemployment to surge further in 2012 or at least to remain above 10.2%, while in Spain the Organization projects unemployment to hit the peak of 23.0%. Finally, economic institutions unanimously agreed that unemployment will remain above 10.0% in 2012, while most of them expect unemployment to surge in the first half of 2012, but then to start declining in the second half of the year if the debt crisis indeed started to be contained and the economy indeed remained in mild recession and then started to recover in the second half of the year according to the most balanced scenario expected. The EUR/USD Forecast: Euro to Loose Strength in the First Half, the Rest of the Year Depends on European Nations In 2011, the EUR/USD pair gained strength in the first half of the year, as European leaders were providing markets with solutions to the debt crisis which in result supported the confidence to remain strong that Europe is able to avoid a financial crisis and it will be able to overcome the debt crisis and growth will recover and eventually Europe will emerge stronger from the 2008 financial crisis. However, in the second half of 2011 the debt crisis started to worsen and deepen, while European leaders were not implementing any of the measures taken earlier, which triggered a drop in the confidence levels as investors were disappointed and lost faith in the euro area. Greece’s financial position also became critical in the second half, while larger economies started to follow Greece, Ireland and Portugal’s steps into deep crisis, which in result spread panic and renewed fears that Greece could default, pulling other countries into the debt-trap, which turned all the focus on Italy and Spain, the third and fourth largest economies in the euro area region respectively, with expectations they will be the next victims of the debt crisis in Europe. The EUR/USD pair opened 2011 at $1.3343, and recorded the highest at $1.4940 and the lowest at 1.2870 during the year. However, the pair is expected to remain fragile and weak in the first half of 2012, where the euro area region is expected to slip into recession in the first quarter of 2011, yet the reaction of European nations and the European Central Bank shall decide the Euro’s faith in the second quarter of 2012. Major Banks agreed that EUR/USD pair will decline in the first half of 2012, as median estimates are expected around 1.3000, 1.2900, 1.2900 and 1.3000 in the four quarters respectively. The highest level expected for the euro against the U.S. dollar was at 1.4800 to be recorded in the fourth quarter in case European nations were able to control and end the debt crisis. The worst scenario for the pair was reaching a low of 1.1300 also in the fourth quarter in case European nations failed to overcome the debt crisis and reduce market tension. European Stocks as well are expected to move in line with the common currency, where European Equities are expected to extend the losses in the first half of 2012 amid the escalating debt crisis and the possible recession; however in the second half of the year, equities are projected to rebound to the upside and to recover some of the huge losses incurred in the past years, where in case European nations tackled the debt crisis growth shall improve and in result European stocks should gain as well.

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.

2012: The year the global economy will make it to shore or break it with depression.!

With the end of 2011 we are standing at the gates of another year and the uncertainty and fear is rather ironically the same that we carried into 2011. The year with all its hectic and rough times did little to change the outlook and is now taking us back to the same challenges in 2012 with the debt crisis still the predominant concern! Fears of the escalating crisis in Europe has spread to engulf global markets and threatening the stability of major economies putting the risk at its highest with global growth and financial stability the possible victims. The year is ending with scattered confidence and doubt that Europe will get its house in order. The debt crisis is spreading and the eyes are on Italy and Spain the next big risk and too big to fail, with also all the EU under the watch and further downgrades that might escalate the crisis with the debut of 2012. Europe’s problems are not only in the euro area with the risk spreading to the United Kingdom that is threatened with a relapse into recession and the stability of emerging economies in the continent that might be scattered as well due to mounting market and economic pressures. The United States is also suffering the wave of pessimism and downside risks to growth from the uncertainty in Europe while it has its own debt problems to deal with as spending cuts come into effect in an election year that will prove to be as critical as the one that originally brought President Obama into the White House. Asian economies are suffering the global agony and China, the hope of nations, also is anguished from slowing demand and the effect of monetary tightening in the past period that pressured growth. Nations depending on exports and on stability in global growth are also affected and especially Australia and New Zealand which are closely sensitive to developments in both the Asian Pacific and Europe Japan is still suffering to exit from its devastating March earthquake and the hit to global stability only escalated the crisis with the yen surging higher and deflation a growing agony with also massive debt that will be brought to focus. What the next chapter will be is a matter of high uncertainty till now. Forecasts range from a mild recession to a risk of depression and all depending on how Europe will confront the crisis and whether the ECB, the IMF or a final breakup of the euro will be the logical solution. The economic debate is only part of the equation as 2012 will prove again to be the year of politics. Ever since the start of the financial crisis and now into the debt crisis, many governments have lost their grip and especially in Europe in 2011. We start a new Election Year in the United States, with unrest sweeping the region in the Middle East, tension expected with Iran, and recently unclear outlook for the Korean Peninsula which all is adding risk to stability especially with the effect this unrest has on commodities and especially oil prices. We will start 2012 with one advice to you dear trader, be wise and be calm as you are not the only one under this uncertainty. As pessimistic the outlook might seem the market will always try to hold onto the faith as the worst is something we surely know governments worldwide will try to contain, as the global economy as we know is what is at risk, and surely everything possible will be deployed to avert the meltdown and depression! What to expect from major economies, what to look for this year and where is the market trend taking us with the start of 2012 we give you the preview of what awaits us…