Top 10 economic predictions for 2012 (page 1 of 2)

By Nariman Behravesh, Chief Economist IHS

If Europe only suffers through a mild recession and China does not suffer through a hard landing, then world growth will decelerate from around 3.0% in 2011 to around 2.7% in 2012. On the other hand, if the recession in Europe is much deeper and/or the slowdown in China more pronounced, then the global economy will be headed for much weaker growth and possibly another recession.

1. The United States will probably avoid a recession

The good news is that US domestic risks have diminished somewhat, and growth momentum has picked up modestly. Consumers seem willing to spend and businesses are more disposed to hire—albeit cautiously. This means that over the next year US growth will average between 1.5% and 2.0%. In the near term, the Eurozone sovereign-debt crisis is the biggest threat to the US economy. The longer-term outlook is clouded by uncertainty over how America's burgeoning sovereign-debt problem will be fixed.

2. The Eurozone is headed for a second dip

All indications are that the Eurozone will suffer through a recession in 2012 — a mild one if the region's sovereign-debt problems are resolved, or a deep one if they are not. Fiscal austerity is in full swing, bank credit is tightening, and confidence is plummeting. With few exceptions, the Eurozone economies will see negative growth next year, with the region as a whole contracting by about 0.7% — at best. Possible, though unlikely, is a much worse recession triggered by messy sovereign defaults and/or euro exits.

3. Asia will continue to outpace the rest of the world

While Asia will not be immune to a recession in the Eurozone, growth in the region will remain resilient and will continue to be the strongest in the world (around 5.5%), for a number of reasons. Japan's post-earthquake rebound will help underpin the region's exports, offsetting some of the weakness in sales to Europe. Chinese growth can be expected to hold up at around 8% and further bolster Asian growth prospects — provided China's housing downturn does not evolve into something much worse. Last but not least, easing inflation will give all Asian governments more leeway to stimulate, if necessary.

4. Growth in other Emerging Markets will hold up, for the most part

The Eurozone crisis and recession will have a differential impact on the rest of the emerging world. Hardest hit will be Emerging Europe, because Western Europe is its most important export destination and also because the region is dominated by subsidiaries of Western European banks — all of which are tightening credit. Latin America and Africa are relatively more vulnerable to the United States and China. Barring a catastrophe in either economy or another plunge in commodity prices, the growth in these regions should hold up fairly well.

5. Commodity prices will (mostly) move sideways

During the coming year, commodity prices are likely to get pulled down by weaker global demand — and pushed up by limited excess capacity and continuing robust growth in key economies, such as China and India. The biggest demand-side risk is the possibility of a hard landing in China. Supply-side risks are commodity-specific. In the case of oil, markets are worried about an escalation of the conflict over Iran's nuclear weapons program. That said, the most likely scenario is for the price of oil and other commodities to fluctuate around current levels.

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