Economic Outlook 2012: Home and
Abroad

Global

The global economic outlook for 2012 is particularly difficult to judge at the moment due to European uncertainty. All in all the global economy is becoming more diverged, with the US and China recovering while the euro area is facing recession and a delayed and slow recovery during 2012. Global leading indicators sent mixed signals in November, but were largely negative, as Asia joined Europe in posting deteriorating Purchasing Manager’s Indices (PMIs). 

Although the global PMI fell back in recent weeks, it is expected to increase again over the next few months as Asia gets back on track after the flooding in Thailand and price pressures from commodities continue to ease.

In terms of ‘new orders’, global PMIs also fell to 48.6 in November from 49.5 the previous month, returning to their September level.  This decline points towards sluggish growth in the global manufacturing sector over the months to come.

On a more positive note, the United States figures were positive in both headline and forward-looking details.  The Institute of Supply Management (ISM) index for manufacturing also came out strong, increasing from 50.8 to 52.7. The ISM details were solid as well, with a positive increase in the new orders component, rising from 52.4 to 56.7. Likewise, the new order-inventory balance continued to show gains, which improves growth prospects over the months to come.  In the US, ISM is expected to move gradually higher into 2012 as US growth recovers further in Q4 to 2.5-3.0per cent.

Unfortunately, in Euroland, manufacturing PMIs show no signs of improvement, declining for the seventh month in a row.   Although the service sector PMI improved moderately,  it is still a contracting sector. Therefore we can expect European PMIs to stay low for the first few months of 2012, signalling a mild recession in the Euro area in Q4 2011 and the first part of 2012.  Overall European growth is expected to be a mere 0.3 per cent in 2012 but forecast growth of 8.9 per cent in China and 2.5 per cent in the United States next year will help to keep the global recovery from derailing.

UK and Northern Ireland

Closer to home the picture is not great.  The end of 2011 brought reduced confidence with the escalation of the European debt crisis issue, as well as some political uncertainty following Mr Cameron’s veto of European treaty changes.  The chances of the  economic recovery in the UK staying on track in 2012 has the odds stacked against it as high inflation in 2011, rising unemployment, and increased taxes have worked to squeeze household spending power and hit confidence levels.  European uncertainty has added another layer of anguish to the outlook. Even if the European problems are resolved, the UK economy will struggle to hold its head above water in 2012, particularly in the first quarter, and a contraction in GDP is - at the time of writing mid-December - looking like the most conceivable outcome. 

Next year, inflation is expected to fall back due to a combination of weak domestic demand and those temporary factors, including VAT, the oil price shock and the deprecation of sterling, falling out of the year on year comparison.  To avoid inflation falling below the target level of 2 per cent in 2013, the Bank of England will without doubt be considering more Quantitative Easing (QE).  Without any support coming from the fiscal side, further monetary stimulus will be badly needed in 2012.  The first increase in QE is expected in January and could be either £50bn or £75bn. Although difficult to estimate, the total asset purchases could amount to £400bn by the end of next year.   Assuming that there is a resolution to the difficulties in Europe,  any stimulus coming from the Bank of England in the first few months should help the UK economy to expand in the second half of next year,  after having backpedalled for a considerable period of  time.

Northern Ireland’s economic fortunes in 2012 will invariably be linked to outcomes in both Europe and the UK.  Local confidence levels are now low for both businesses and households, although the impact on the labour market has been less dramatic than in many other countries.  The Executive’s plans to grow the private sector through exports, while still appropriate, will be up against extremely challenging global conditions for at least the early part of next year.  Companies must bear in mind that demand in Europe will shrink substantially in 2012 and hedging against fluctuations in foreign exchange will play a huge role in reducing risk.  In addition, looking to markets beyond Europe will be important and when navigating an economic environment with heightened uncertainty, good cash management will be critical.