Economic Outlook 2012
Posted on 30. Dec, 2011 by editor in Business News
Stephen Boyle, Head of Group Economics at RBS, discusses the crucial factors that will determine economic performance during 2012 and provides his thoughts on how any recovery will take shape:
2011 saw the recovery all but run out of steam, unemployment crept up, and the Bank of England is loosening, not tightening, monetary policy with quantitative easing.
What does this mean for businesses in 2012?
We at RBS and NatWest asked local East Midlands businesses about how they see the next 12 months. 22% of East Midlands businesses asked said they thought 2012 would be a better year than 2011, which is more optimistic than the UK average of 18% – 78% believed it would stay the same.
44% of those surveyed believed that surviving will be the biggest challenge in the next 12 months, with 33% seeing the attraction of new talent as their biggest opportunity next year followed by the Olympics (22%) which is significantly more than those surveyed in London (9%) who saw the games producing opportunities for them.
The big question for 2012 is will the economy slip back into recession, or will the recovery get back on track? The answer to that question will depend on three issues: the Euro Zone crisis; inflation; and investment. Let’s briefly look at each of them:
Euro Zone – The Darkest Hour is just Before the Dawn?
The Euro Zone crisis is spreading so quickly that it’s difficult to keep a sense of perspective. What started as a sovereign debt problem in ‘peripheral’ countries like Greece now affects the whole of the Euro Zone. Even France and Germany are not immune.
And the longer the crisis drags on without a credible solution, the worse it will be for the UK economy. Our exports are still growing at a decent pace, by around 10% year on year in October, but the threat of recession in the Euro Zone casts a shadow over the outlook for 2012.
Many still feel the most likely outcome is that all 17 existing members will stay together, for the simple reason it is not in anyone’s interest to leave, or to push others out. But the risks of a disorderly breakup have obviously increased in recent months.
Inflation – Less Pressure on the Pound in your Pocket?
Inflation was higher than I expected in 2011. It rose to a recent peak of 5.2% in September and has only come down slightly since then. With earnings growing at only 2%, this means real take-home pay is falling, in what amounts to the tightest squeeze on households for more than 30 years.
This hit consumer-facing businesses hardest in 2011. Small retailers seem to have fared slightly better than large retailers, somewhat surprisingly, but the difference is small.
The good news is that inflation should fall in 2012. This partly reflects the weakness of demand in 2011, but also some sizeable “base effects”. For example, last year’s VAT hike will drop out of the equation and we don’t expect energy prices to keep rising like they did in 2011.
Investment – Can We Short Circuit the Pessimism?
When businesses see uncertainty playing out on a global scale, they rightly feel nervous about their own prospects. This makes them less likely to borrow in order to expand, further undermining recovery.
A circuit-breaker is needed to restore confidence for small businesses. That is what we are hoping to provide with our new Fixed Rate Loan of up to £250k – quite simply, it is our best ever offer. This will save NatWest and RBS customers around a quarter of the cost of fixed rate loans up to £250,000, in many cases more.
Conclusion – 2012 another Challenging Year
In my introduction, I asked the question: will the economy slip back into recession, or will the recovery get back on track? On balance, I think we will avoid a recession. But it’s a close call and there are many risks. Realistically, 2012 will be a challenging year, and it will be 2013 before the recovery starts to get back on track”
