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Posted: January 31, 2012

Outlook 2012: Part 1

A look in our economic crystal ball

Bill Greiner

The developed world is in turmoil, and has been for the better part of 10 years. Unsettling news concerning banking, currency and political messes make daily headlines. We are seeing the unwinding of a global debt supercycle whose origins date to the early 1970s, depending on the country.

Japan's economy has been in a no-growth mode for 25 years. Political leaders in the U.S. cannot seem to make any decisions as the nation continues to dissect our political needs from wants. The very structure of Europe's banking, currency and economic systems is in flux. The developed world seems to be coming apart at the seams. The long, hard slog continues.

A Secular Slowing of Growth

We have long held the view that developed economies' dysfunction resides in a secular slowing in growth, coupled with a systemic rise in debt structure. This profile has been building for the better part of a quarter century. Last year, we outlined why the developed-world‘s long-term economic growth rate has been slowing. The slowing is due to many issues, including demographics and a secular shift from private sector dominance to economic systems which rely more heavily on government involvement. This has all been a reaction to the developing world's increased dominance of worldwide economic power.

Our thematic piece published in October 2010, Black Swan Rising, outlined in detail our thoughts as to why a slowing in systemic growth has led to a higher-than-normal level of uncertainty, which we believed would continue. The increased level of uncertainty towards the sustainability of economic growth led to a rise in secular volatility rates within the financial markets. We postulated that those trends would continue in 2011. Indeed, that call was accurate.

Has anything happened over the last year which changes our view of slower-than-historical growth rates coupled with higher volatility in the developed world, at least over the short-term?

In a word, no.

Economic Growth and Inflation Forecasts

If we are correct in our overall view of pressures and opportunities, the world's economic environment may, for the majority of 2012, resemble an economy slowing in its overall growth profile, dragging inflation down.

In this environment interest rates, particularly high quality sovereigns, should remain low, and perhaps move lower still. We believe the world's investors will continue to scramble for sustainable income streams. This rather benign environment masks deep troubles that, at times, will surface.
Global Economic Outlook Highlights
Why No Worldwide Recession
What gives us heart that the world will escape an outright economic contraction? We believe a full 65 percent of the world's economies will experience some level of economic growth deceleration compared to 2011. Central banks have been very busy attempting to liquefy banking systems to provide ammunition to economies for expansion purposes. Central banks which have been lowering interest rates or taking other easing actions include:
United States, Euro Area, Japan, United Kingdom, Switzerland, Australia, New Zealand, Russia, Czech Republic, Romania, Turkey, Israel, South Africa, Hong Kong, Indonesia, Thailand, Brazil and Mexico.

These 18 central banks represent economies which dominate worldwide economic power. Indeed, the only central banks which have continued tighter monetary policies include: China, Canada, Sweden, Norway, Poland, Hungary, Nigeria, India, South Korea, Taiwan, Malaysia, Chile, Peru and Columbia.

The U.S., by itself, generates more GDP (in dollar terms) than all the countries mentioned in the second block combined. Consequently, it is easy to say the world's central banking system is very much aware of economic risks, and is concerned primarily about growth. It is very rare for the world, in total, to enter a recession when the great bulk of central bank activity is concentrated on avoiding an economic contraction.

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Bill Greiner is the president and chief investment officer of Scout Investments, Inc.,a subsidiary of UMB Financial Corporation that offers investment management services for both managed accounts and mutual funds. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

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