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Economic Outlook 2012

Financial Executive, 17 January, 2012

 

Economic unrest across Europe, unsettled global banking networks and political and fiscal uncertainty in the U.S. — as well as contentious presidential and congressional elections — are some of the major issues setting the global economic agenda this year.

By Scott Ladd

Nineteenth century French novelist Alphonse Karr is credited with coining the phrase, “The more things change, the more they remain the same.” When it comes to assessing the global financial picture for 2012, it’s fair to say that Karr’s opinion is only half right. Based on what on forecasters predicted for the United States and world economy at the start of 2011 and how they envision events unfolding this year, the script contains far more questions than answers.

Certainly, persistent high unemployment remains a problem. The debate over tougher regulatory measures has only intensified. Trillions of dollars held by American and global companies operating in the U.S. continue to sit on the sidelines, paralyzed by an uncertain financial future.

But the key actors in determining whether 2012 will be a year of global recovery or recession are changing. No longer are U.S. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner the most dominant voices in the discussion. They’ve been supplanted, to a considerable extent, by German Chancellor Angela Merkel and Mario Draghi, the new president of the European Central Bank.

As such, Europe has elbowed economic giants China and the U.S. from the spotlight for the moment. How the European Union and the euro zone nations resolve — or fail to resolve — their mushrooming financial challenges may determine not only the fate of the European Union and the euro, but whether a tepid recovery under way in the U.S. continues to gain steam, or slams into another recessionary wall. The chances of a global recession, according to many leading economists, are 50/50.

Euro zone summits, such as the one held in early December, have become the norm, rather than the exception. And philosophical differences remain abroad on how aggressively to bail out vulnerable national economies and how constrictive or flexible monetary police should be. The fate of the euro, the common currency binding and vexing the euro zone, is unclear.

In the U.S., the picture likely will be colored by the presidential and congressional elections, with all eyes on jobs and the job creation front. Few expect substantive amendments to the current tax structure until 2013, at the earliest, and forecasts on how quickly employment levels can start to return to something closer to pre-great recession numbers tend are cautiously optimistic, at best.

Growth overall is still a question mark. The outlook in November by the Organization for Economic Cooperation and Development projects the U.S. growth rate at only 2 percent, down from a 3.1 percent forecast last May. Some economic indicators in the U.S. are starting to provide a few signs of optimism through an otherwise cloudy sky. The rate of industrial production, consumer confidence indexes and retail sales figures are moving in the right direction.

Another good piece of news — and to say this is “good” shows the depth of the problem — is that by late November the unemployment rate fell to 8.6 percent, the lowest it’s been in more than two years. But that jobs figure sent a mixed message, since more than 300,000 unemployed were said to have dropped out of the job market altogether.

Those developments and decisions, both political and economic, will steer the global economy either toward long-awaited recovery or debilitating recession. Paul Marinaccio, a former economic development policy chief for New York City and CEO of Tribeca Leadership LLC, a New York-based global executive coaching and leadership communications firm, notes that impending U.S. challenges are formidable, varied and complex, testing both political and corporate leadership.

“Assume it will continue to be a struggle in an election cycle for the federal government to agree on global competitiveness strategies, in areas such as energy and transportation, and that deficit reduction will continue to dampen the government contribution to GDP,” says Marinaccio.

Not-So-Smooth Sailing Economic analysts believe the chances of a smooth economic sail in 2012 are slight. Some offer dire predictions about how events may unfold in the months ahead. Frank-Jürgen Richter, former director of the World Economic Forum, predicts the troubles besetting Europe could have a profound and damaging impact.

”It’s realistic to expect several European countries to default,” says Richter, founder of Horasis, an organization that studies emerging global markets. “China, in particular will suffer at the hands of a rapidly declining euro zone. So, too, will South America.”

Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, D.C., adds that if the commitment to austerity across the EU endures, it could yield a period of tough medicine for several European nations individually, and for the EU as a whole.

“The euro will likely survive because the euro zone authorities have some commitment to it,” says Weisbrot. The bigger problem, he adds, “is that there will be prolonged high unemployment and stagnation because the ECB [European Central Bank] refuses to keep sovereign borrowing costs at a reasonable level, which it could do.”

In comments to the German Parliament in December, Merkel expressed optimism the EU would emerge in good shape, and that the union and the euro were inextricably linked. “The future of the euro is inseparable from European unity. The journey before us is long and will be anything but easy,” she said. “But I am convinced that we are on the right path. It is the right path to take to reach our common goal: a strong Germany in a strong European Union that will benefit the people in Germany, in Europe.”

Not only is the U.S. standing anxiously by as the European drama plays out, but China will also be affected by the outcomes and adapt in ways that will have impact on its own domestic economy, experts believe. “China’s way of growing will change, but it will continue to grow rapidly. Obviously, it will encounter decreasing demand from Europe, and in response it will shift to policy that spurs domestic demand to make up for those losses,” says Richter.

Many economic analysts expect the U.S. Federal Reserve will implement a third round of stimulus in 2012. As prospects for a U.S. slowdown have increased, the Fed is quietly signaling it will engage in another round of quantitative easing early this year. As a result, chief financial officers and corporate treasurers of companies that maintain international operations and markets could face challenges in crafting the proper investment and hedging strategies, taking into account all possible fundamental developments abroad.

QE3, says Alan Barber, domestic policy coordinator for the Center for Economic and Policy Research, could prove effectively stimulative at a time the economy needs help.

“There is no reason that the Federal Reserve should not act to promote growth,” says Barber, who has been supportive of quantitative easing in the past as a tool of fiscal assistance. “One effect of further quantitative easing would be lowering the value of the dollar and thus making U.S. goods more competitive internationally. The main barrier to further Fed action remains political,” he says.

The Odds of Global Recession
The specter of a global recession hangs over any discussion of the potential recovery ahead. The determinative issues abroad — sovereign debt, banking difficulties, potential political fragility — combine with factors in the U.S. that contribute to the ongoing slowdown (the poor housing market and a mostly sluggish consumer market overall, among other things) to muddy projections about a prospective new recession.

Barber notes that modern recessions in the U.S. have been preceded typically by plunging house and car sales, and both sectors continue to struggle mightily. At the same time, he says, “other sectors — consumption and investment in equipment and software — are experiencing some modest growth.”

”Together, this indicates that GDP will not go negative, though we will likely see slow growth that just keeps pace with the growth of the workforce along with stubbornly high unemployment, but not a double-dip recession,” adds Barber.

Richter is less optimistic on both a U.S. and global scale. “The odds [of a global recession] are greater than 50 percent. I’m forecasting the next recession to be driven by a fundamental lack of demand across the vast majority of the consumer sector.”

“This will cause a long-term recession, where saving the banks won’t stop the bleeding, let alone heal the wound,” says Richter. “We might even experience a lost decade in both the U.S. and in Europe, similar to what Japan went through recently.”

What CFOs are Thinking?
Those short- and long-term economic concerns are shared by leading financial executives. In the most recent quarterly survey conducted by Financial Executives International and Baruch College’s Zicklin School of Business, the “CFO Outlook Survey,” executives in the U.S., France and Italy were split on their assessment of the strength of the U.S. from a competitive standpoint, but were skeptical about a near-term economic recovery.

“The most recent findings reveal their shaken confidence in prospects for a stable economy and strong business growth,” says John Elliott, dean of the Zicklin School. “CFOs are closing out [2011] in a worse position than when they began and are forced to make tough decisions to protect their business and prepare for a tumultuous road ahead.”

Despite an overall sense of economic gloom, more than half of the U.S. CFOs interviewed said they planned to hire additional workers over the next six months, and slightly fewer than half of the European respondents said they would be hiring. Inflation continued to be a nagging concern of business leaders, more pronounced in Europe than in the U.S.

And financial executives from both the U.S. and Europe forecast generally high unemployment rates throughout 2012; U.S. executives foresee an 8.9 percent monthly unemployment rate by the end of the year and European CFOs predict an 8.6 rate.

Assessing the U.S. Job Market
For business executives — financial and otherwise — the labor prognosis for the upcoming year is unsettled. With perhaps trillions in potential investment capital going unspent due to corporate indecision or disdain of tougher regulation and oversight, many managers of businesses small and large are resistant to committing to new jobs, expanding plants and infrastructure and making the kinds of investments needed to help kick-start a substantial recovery.

Unemployment rates, while experiencing a drop in November, are not guaranteed to continue to decline, given all the global uncertainty, corporate concern with the regulatory environment and other factors.

“It’s hard to predict an actual figure one year from now, given the number and scope of national and global issues impacting the economic environment — and how quickly and frequently these issues are shifting the landscape,” says Paul McDonald, senior executive director fo employment and human resources consulting firm Robert Half Management Resources Inc. “Many people pay careful attention to the national unemployment figure, but there are other numbers that deserve a closer look,” he adds.

What McDonald describes as “a tale of two job markets” has emerged — one for the general market, another for specialized workers. Demand for specialized talent is solid, and candidate shortages have emerged. Chief financial officers, says McDonald, have encountered stiff recruiting challenges of late. The most recent Robert Half Professional Employment Report found that 68 percent of CFOs reported difficulty finding skilled professionals today, compared to 50 percent just one year ago.

The level of specialization, McDonald adds, can determine the health of the hiring market in a particular industry sector or profession. According to U.S. Bureau of Labor Statistics research, unemployment rates stand at 3.4 percent for accountants and auditors — and 0.6 percent for financial analysts. Health care, financial services and manufacturing continue to grow and reflect the strongest hiring activity, McDonald says, adding that Robert Half research predicts more robust hiring this year in the transportation and construction fields.

To return to a brighter economy, many companies have been building their cash reserves. One of the keys to improving the economy, experts say, will be the encouragement of renewed investment in hiring and training. With baby boomers retiring in progressively larger numbers, a talent shortage could follow.

Scott Ladd is a contributing editor with Financial Executive.

 


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