What does 2012 hold for the world economy? Will it fall into a double dip recession? Will the euro zone take us all down with it? While acknowledging that predicting what will happen next year is a dangerous business, economist and founder of Strategy Economics Matthew Lynn decided to try anyway.
According to Lynn, who published a set of 10 predictions for next year on Wednesday, some of which may at first seem outlandish but could yet turn out to be true, the US will become the economic powerhouse it once was again, Germany will begrudgingly accept the need for money-printing and Poland will become a European economic powerhouse.
The US will take over from Germany as one of the most resilient economies in the world, Lynn said. He predicted it would see respectable economic growth next year alongside an easy return to the White house for Barack Obama at the November general election.
“With the euro-zone imploding, and the Chinese property market starting to wobble, US assets will be in strong demand. The dollar will be the most sought after currency in the world,” he added.
European Central Bank (ECB) chairman Mario Draghi – himself only in recently appointed - will resign in 2012, according to Lynn’s forecast.
While admitting making predictions for the euro-zone “make as much sense as trying to forecast the weather for the summer of 2020,” Lynn said it remained the case that the simplest way out of the current euro zone crisis was for the ECB to start printing money. He added it also remained the case that the main problem with the ECB doing this was selling the idea to Germany.
“It is doubly difficult when you happen to be an Italian – Germans don’t trust Italians with their money and it is Italy that will need bailing out,” he added.
A German at the ECB
But Lynn suggested Germany would be more willing to accept such a prospect were there a German in charge of the ECB. “When it comes to the crunch, Draghi will step aside, a German will be installed in his place, and the printing presses will be switched on," he said.
Britain’s economic recovery might have to wait until August if Lynn’s third prediction were to come true. He suggested the Olympics would bring the “feel-good factor” back to the UK despite the French spending most of 2012 telling everyone the UK economy was in as bad a shape as any in the world.
While the French might be technically correct – with the UK’s debts towering to 450 percent of GDP, its key industry, financial services, in structural decline, and its main trading partner, Europe, heading into a deep recession - the London Olympics would be a huge success, Lynn predicted. Throw in a devalued currency, falling wages, and a flexible labor force and the UK economy would start re-inventing itself in 2012 with the Olympics seen as the turning point.
Despite protests over the validity of the results of recent parliamentary elections in Russia, and plenty of political uncertainty in the run-up to the Presidential elections in March, Lynn predicted Vladimir Putin would still emerge as victorious but weakened and should that happen would resign soon afterwards on health grounds.
Should that happen, however unlikely, a reformed Russia would swiftly liberalize its economy, and accelerate its development, Lynn argued, making it the most sought-after of the BRIC countries by the end of the year.
Another of Lynn’s predictions was that Poland could emerge as Europe’s economic powerhouse in 2012. While initially this could sound far fetched, he pointed to the fact that the government deficit was 5.9 percent of GDP in 2011 and was forecast to fall to below 2.9 percent in 2012. Government debt as a percentage of GDP will fall to 52 percent next year.
“The main rating agencies have re-affirmed its credit rating as stable. It is forecast to grow by 2.5 percent in 2012 even as the euro-zone slips into recession. And with 38 million people, this is a major country. As countries such as France lose their triple-A rating, and nations such as Britain drift away from the EU, there will be space for Poland to have an increasingly assertive voice,” he added.
Iceland, an Example
Another initially outlandish prediction was that Iceland would become a star economy and held up as an example of how to get out of an economic crisis. Iceland was one of the few countries not to bail out their banks and instead defaulted on $85 billion of debt, leading mainstream opinion to suggest the country was finished. But Iceland’s economy grew by 2.5 percent in 2011 and is forecast to grow by 1.5 percent next year, faster than the euro-zone.
Lynn added capital controls were being steadily lifted, and the exchange rate was strengthening again.
“The lesson is inescapable, “he said. “You don’t need to bail out your banks after all. Next time there is a banking crisis, it is going to be far harder for industry leaders to sell the idea they need to be rescued. Just look at Iceland people will say – and it will be hard to argue they don’t have a point.”
On a somewhat more technical level, Lynn suggested the economics of debt would come into fashion in 2012. Conventional economics has always been that debt doesn’t matter: One person’s debt is another person’s credit, and since the world can’t be in debt to itself, all the credits and debits have to equal out.
However, according to Lynn, the events of the last few years have proven that this theory isn’t quite right. “Once debt gets above a certain level, it starts to impact on spending – and its looks as if the debtors cut back on their spending more than the creditors increase theirs," he said.
“Debt does matter. The economics profession will learn that lesson in 2012 – and start figuring out how to incorporate that into its models,” he added.
One of the least controversial and certainly feasible predictions is that an investment bank could shut down. Worldwide some 200,000 investment bank staff were made redundant in 2011 and according to Lynn the number of redundancies in 2012 would likely only get worse.
“This is an industry in serious trouble. Banking expanded during the three decades that the developed world leveraged up. During a two-decade de-leveraging, banking is going to become a smaller industry,” he said. “So an investment bank will shut down in 2012. We can’t say which one – but we can all have fun guessing who it will be.”
Interest Rates Rising
Another very feasible prediction and was that interest rates would begin to rise. Lynn said this was obvious given that the world increasingly short of capital and global saving was about to fall off a cliff.
Moreover, the global economy would learn it could not rely on China to continue to buy its debt. “China is not going to save as much in the next decade as it did in the past. Typically, as economies grow more mature, they save less and consume more. There is no reason for thinking that China will be any different,” Lynn said.
He suggested this would also be true of other emerging economies such as India and Brazil adding at the same time, populations are rapidly aging – not just in the developed world, but in places such as China as well.
"Typically, older people don’t save. Indeed, they live on the past savings. In short, there will be a lot less spare capital around. You don’t need to know much about economies to figure out that means prices will go up. How much? No one can say for certain. But the era of ultra-cheap money will come to an end,” he added.
Lynn’s final prediction was the demise of the electronic Christmas card, suggesting just how seriously he took any of his own predictions.
“Do any of us really need festive greetings from a small bank in Latvia we’ve never spoken to? Is that Austrian management consulting firm sincere in wishing me the best for the holiday season? I doubt it. Listen up guys. It’s not thoughtful. It’s not touching. It’s spam. Frankly, I’d rather get another e-mail from that friendly Ukrainian company that supplies Viagra without a prescription. By Christmas 2012, sending out e-cards will be socially unacceptable - and not too soon," he said.