U.K. 2012 Outlook: A Difficult Year, 'Recession-Like' in 1H
Jonathan Ashworth, Morgan Stanley
We believe that the economy will for all intents and purposes be in recession in 1H and could easily meet the technical definition of two consecutive quarters of negative growth. Consumers will be buffeted by rising unemployment and tightening credit conditions, although sharply falling inflation will provide some offset, in our view. Business investment is likely to be subdued while uncertainty prevails and the government sector will remain a drag. Net exports will provide some support, as weak domestic demand depresses imports.
EUR Shorts at Extreme Levels
Sverre Holbek, Senior Analyst, Danske Bank
EUR shorts at extreme levels: EUR net shorts have reached record levels, at -127,900 (net contracts) and more than 46% of open interest. The latter corresponds to a deviation from the mean of more than 4 sigmas, indicating very crowded positioning. Hence, while we have pencilled in further EUR weakness in our latest FX forecasts (FX Forecast Update: Moving closer to a bottom in EUR/USD, 20 December 2011), stretched positioning may limit the downside in EUR/USD.
Europe: Renaissance or More Dark Ages?
John E. Silvia, Chief Economist, Wells Fargo
The greatest risk to our 2012 economic outlook relates to the ongoing European sovereign debt crisis. We continue to believe that the Eurozone will avert a full-blown financial crisis and endure only a mild recession, which would have only minor ramifications for U.S. economic growth next year. However, the risk of a full-blown financial crisis in Europe is certainly not insignificant, especially considering that debt dynamics within Europe’s larger economies—notably, Spain and Italy—have deteriorated noticeably since the summer months.
Outlook 2012: More Naughty Than Nice
Craig Alexander and Leslie Preston,TD Bank Financial Group
The European fiscal crisis is far from over. It is taking the harsh discipline of financial markets to push Europe towards some form of fiscal union necessary to prevent another Greece. However, it entails 17 democratic member states relinquishing some of their sovereignty, which makes for a protracted and messy process. The primary challenge is that Greece will eventually have to default, and European leaders will have to limit contagion from this event and will have to recapitalize their banks. We assume that Europe will avoid triggering a systemic banking crisis, and an ensuing 2008-style financial meltdown. But, this is the number one risk to the outlook.
Compiled by David Song, Currency Analyst
