Chief strategist Mike Lenhoff - 5 January 2012
Bad, but not all bad and maybe better than expected
With one important exception economic prospects for 2012 appear lacking in promise. In addition the balance of risks to the outlook appears stacked to the downside. This is not wholly because of the crisis in the eurozone. In looking elsewhere, such as to the developing world, the loss of economic momentum that is underway has only partly to do with the eurozone.
Yet the eurozone remains central to the outlook. This is not just because of doubt about whether its leaders are credibly applying themselves in tackling the crisis. The doubt is also about whether the eurozone’s difficulties, the financial crisis and the issue of sovereign debt sustainability behind it, can be credibly resolved at all. The pressure in eurozone sovereign debt markets and the stress in funding markets for the banks reflect this sentiment.
Over the past months, consensus forecasts for GDP growth and corporate earnings for the year ahead have been revised steadily downward. This revision of expectations is likely to continue and equity markets are discounting some of this already. However, they are still likely to grapple, as they have, with the valuations that apply in an environment of great uncertainty for earnings growth and this begs the question whether the degree of volatility seen during the latter half of 2011 will be repeated in 2012. This point is addressed later. But first, the bright spot! More >