IHS Chief Economist, Nariman Behravesh, releases the top 10 economic predictions for 2012.

1. IHS Top 10 Economic
Predictions for 2012
Nariman Behravesh
Chief Economist, IHS
December 2011

2. About Nariman Behravesh
Dr. Nariman Behravesh is Chief Economist of IHS and author of Spin-
Free Economics: A No-Nonsense, Nonpartisan Guide to Today's
Global Economic Debates (McGraw-Hill). Directing IHS' entire
economic forecasting process, he is responsible for developing the
economic outlook and risk analysis for the United States, Europe,
Japan, China and other emerging markets. He oversees the work of
over 400 professionals, located in North America, Europe, Asia, Latin
America, the Middle East and Africa who cover economic, financial, and political
developments in over 200 countries.
Behravesh and his team have ranked among the top economic forecasters over the
years in surveys by Reuters, USA Today, MarketWatch and The Wall Street Journal.
Behravesh holds Ph.D. and M.A. degrees in economics from the University of
Pennsylvania, and a B.Sc. from the Massachusetts Institute of Technology. He
is fluent in several languages and travels regularly to Europe, Asia, Africa, and
Latin America.
© 2011, IHS Inc. 2

3. Overview
World growth will slow in 2012 – the only question is how much
• A problematic combination of private-sector de-leveraging, public
sector austerity, and lack of confidence in politicians is plaguing the
U.S. and Europe
• U.S. economy can be expected to muddle through, but Europe will
not be so lucky
• Meanwhile China is slowing and there is growing anxiety about a
hard-landing
• In the most likely scenario, world growth will slow from 3% in 2011
to around 2.7% in 2012
• A Eurozone meltdown and/or a China hard-landing will mean much
weaker global growth and possibly another world recession
© 2011, IHS Inc. 3

4. Prediction 1:
The United States Will Probably Avoid a Recession
• 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 2012 growth is likely to come in between 1.5% and 2%
• The Eurozone sovereign-debt crisis is the biggest threat to the U.S.
economy
• The longer-term outlook is clouded by uncertainty over how America’s
burgeoning sovereign-debt problem will be fixed
© 2011, IHS Inc. 4

5. Prediction 2:
Europe Is Headed for a Second Dip
• All forward-looking indicators suggest that Europe is headed for (or
already in) a recession …
• … A mild downturn 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
• Few, if any, countries will be able to avoid negative growth
• The Eurozone economy will likely contract by around 0.7%
© 2011, IHS Inc. 5

6. Prediction 3:
Asia Will Continue to Outpace the Rest of the World
• Asia will not be immune to a Eurozone recession …
• … But strong growth momentum and economic resilience will help the
region grow around 5.5% in 2012
• 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 (7.5% to 8%), also bolstering
regional growth prospects …
• … Provided China’s housing downturn does not evolve into anything
much worse
• Last but not least, easing inflation will give all Asian governments the
leeway to provide policy stimulus if necessary
© 2011, IHS Inc. 6

7. Prediction 4:
Growth in Other Emerging Markets Will (Mostly) Hold Up
• The Eurozone crisis will have a differential impact on the rest of the
emerging world
• Hardest hit will be Emerging Europe, since 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, the Middle East and Africa are relatively more vulnerable
to the United States, China and the rest of Asia
• Barring a catastrophe in Asia or North America and/or another plunge in
commodity prices, growth in these regions should hold up fairly well in the
coming year
© 2011, IHS Inc. 7

8. Prediction 5:
Commodity Prices Will (Mostly) Move Sideways
• Commodity prices will get pulled down by weaker growth in the developed
world …
• … And pushed up by limited spare capacity and continued robust growth
in key emerging economies, such as India and China
• 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 conflict over
Iran’s nuclear weapons program
• Bottom line: the most likely scenario for the price of oil and other
commodities is fluctuations around current levels
© 2011, IHS Inc. 8

9. Prediction 6:
Inflation Will Diminish Almost Everywhere
• With world growth softening and commodity prices off their peaks,
inflation in every region (and almost every country) will decline in 2012
• The disinflationary process will be most pronounced in the developed
world, because of vast amounts of excess capacity in both labor and
product markets
• In the emerging world, the recent declines in food prices are having the
biggest impact
• Without a spike in food or fuel prices – triggered by geopolitical events or
bad weather – the inflation picture in 2012 will be quite benign
© 2011, IHS Inc. 9

10. Prediction 7:
Monetary Policy Will Either Be on Hold or Ease Further
• Easing inflationary pressures and increasing anxiety about the growth
outlook have changed the priorities of central banks worldwide
• Central banks with policy rates already at or near zero (the Fed, Bank of
England and Bank of Japan) will keep rates low indefinitely (or at least for
a couple more years) …
• … With further quantitative easing likely
• Some central banks that had been raising rates have now stopped (e.g.,
the Reserve Bank of India) …
• … Others that had been tightening have reversed course and are now
easing (e.g. the European Central Bank and the People’s Bank of China)
© 2011, IHS Inc. 10

11. Prediction 8:
Fiscal Policy Set to Tighten Further in the U.S. and Europe
• Notwithstanding the policy deadlock in Washington, U.S. fiscal policy is
already tightening
• Federal government purchases (in real terms) will contract over the next
several years, acting as a major drag on growth
• State and local spending is also expected to fall for at least another year
• In Europe, not only are the most indebted countries (Greece, Ireland and
Portugal) in the midst of tough austerity programs …
• … But three of the four largest Eurozone countries (France, Italy and
Spain) are being pressured to drastically cut budget deficits and
sovereign-debt levels
© 2011, IHS Inc. 11

12. Prediction 9:
With the Exception of the Euro, the Dollar Will Keep Sliding
• Economic fundamentals suggest that the dollar should keep sliding
against most currencies …
• … The U.S. current account deficit is still huge, and both growth and
interest rate differentials favor emerging market currencies
• However, as long as the Eurozone crisis drags on, the euro is likely to
depreciate against the dollar – reaching around $1.25 by next spring
• In a Eurozone financial meltdown scenario, the euro could easily go to
parity against the Greenback – or lower
• In such a scenario, the dollar would likely also rise against most
currencies – as it did in the fall of 2008
© 2011, IHS Inc. 12

13. Prediction 10:
Most of the Risks to the Outlook Are on the Downside
• While there are many risks facing the global economy in 2012, two look
particularly threatening
(1) The biggest risk is a “Lehman moment” in Europe with some small
countries exiting the Eurozone and/or a messy default by one or more
large Eurozone countries, especially Italy or Spain
• Such a scenario would drag the rest of the world into recession
(2) The second big risk is a sharp slowdown in China (to around 5%),
triggered by a bursting of the real estate bubble
• This scenario would have the biggest impact on the rest of Asia and
the commodity-exporting emerging markets
© 2011, IHS Inc. 13

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© 2011, IHS Inc. 14