Taking lessons from 2011 to evaluate the economy in 2012


January 31, 2012

 

Evaluating the economy in 2011 from nearly any angle shows that it was a very unusual and rocky year in many respects, making a major impact on the financial planning decisions of many. However, there may be some things investors can take from last year and put toward determining what will be the key factors in the new year.

One of the first things that 2011 has showed is that the turnaround from the recession likely won't be a rapid one, like the ones seen following slowdowns in the last few decades. A study completed by economists Kenneth Rogoff and Carmen Reinhart predicted a period of economic weakness following the recession, since it more closely resembled the financial crises seen in Japan and other countries more recently.

Government fiscal policy - both in the U.S. and Europe - will also continue to be a major factor in the health of capital markets worldwide, says John Maggs, Senior Economics Editor of The Kiplinger Letter. In the early part of this year, Congress will face a pitched battle as it works to extend the payroll tax cut, among many other challenges.

The situation in Europe also remains tenuous. Germany has been one of many countries calling for steep budget cuts to reduce debt, he says. However, as its own economic growth slows, even that country may move more in favor of stimulus measures, prolonging the wider debt crisis even further.

In addition, while they may have taken a back burner to other parts of the economic situation in some respects, Maggs says oil prices continue to be a major issue that could create significant turmoil.

Iran's recent aggression in the Middle East continued to create some uncertainty in the region. The U.S. and Europe moving to enforce stronger sanctions on Iran may continue to drive up the cost of oil, which could filter back into the larger picture and stall the recovery.

"A spike in oil prices would hit already meager consumer spending and could easily turn slow growth into no growth," he said.

Already the sanctions made against Iran, which are set to be phased in throughout the first several months of this year, have had a noticeable impact on oil prices. In the first week since they were signed into law, oil prices jumped nearly $7 per barrel. The threat of military confrontation will do little to bring down prices.

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