Economic Outlook

Growth rates in our major markets will decelerate further, at least temporarily. Anxious consumers and cautious companies will for now offer little growth impetus. Recently, the leading indicators have shown some improvement and are reason to hope that a renewed phase of recession can be avoided, with the exception of the euro zone. Looking the best right now is the USA, which in 2012 will presumably record the strongest growth of all our key markets. Once again bringing up the rear will be the euro zone, where a slide into a minor recession is entirely possible due to the necessary consolidation measures.

Heightened inflation in the emerging nations has led to a tightening of monetary policy, which in turn will result in lower growth rates. However, a hard landing is unlikely. In several of those countries, interest rates have already been reduced again in order to boost economic activity.

Inflation pressures are gradually receding as a result of slower growth. Despite the central banks’ expansive monetary policy, prices increases have yet to emerge because bank lending is still at a moderate level. In 2012, inflation rates should come in below 2% and in Switzerland even below 1% due to the strong Swiss franc. However, the steadily rising commodity prices in response to tensions in the Middle East represent a potential risk to our inflation outlook.

We do not expect to see any interest rate hikes in our major markets for the foreseeable future. The challenging economic environment hardly allows for that. Another rate cut in the euro zone is entirely conceivable, but for the time being we are not anticipating such a move.

USA:

The recent US economic indicators have come as a pleasant surprise, but that is no reason for euphoria. Given America’s huge national deficit, government spending will barely increase and the uncertain future is causing sharp cutbacks in corporate capital spending. Despite a high level of unemployment, private consumption is astonishingly robust but it will hardly be capable of generating more than a moderate 1.5% rate of growth in 2012.

Europe:

The outlook for the euro zone is less than rosy. Most of the leading indicators are below the expansion/contraction breakpoint of 50. The consolidation of state finances is unavoidable and is leaving behind a trail of uncertain consumers. Moreover, a credit crunch could arise in a worst-case scenario. For 2012, we are currently anticipating only a modest 0.5% decline in GDP – however, one or two quarters of negative growth are entirely possible as the new year evolves.

Switzerland:

The leading indicators have long been pointing towards a decline in economic activity. Switzerland is progressively slipping into the undertow of global growth deceleration. Given the noticeable deterioration in consumer sentiment and companies' current lack of desire for capital spending, key growth drivers will remain absent for the time being. We reckon with a growth rate of at best 1% in 2012.

Emerging nations:

The emerging markets are likely to show a mixed picture in the current year. While Asia will lead the global growth rankings, the situation in Eastern Europe should remain tense. In South America, declining inflation rates are paving the way for monetary ease. But ultimately, the economic happenings in Latin America will be dependent on commodity prices.

VP Bank (Singapore) Ltd.

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