Some interesting predictions from the Centre for Economic and Business Research for 2011:
1)Yet another eurozone crisis in the spring if not before, when Spain and Italy have to refinance in aggregate over €400 billion of bonds. The euro might break up at this point, though European politicians are normally able to respond to a crisis and I suspect that what will break up the euro will be the failure of most of the countries to take the tough medicine necessary to make their economies competitive over the longer term. We give it only a one in five chance of surviving in its present form for ten years. If the euro doesn’t break up, this could be the year when it weakens substantially towards parity with the dollar.
2) Slower economic growth. As the boost from the end of destocking comes to an end, countries will have to rely on the fundamentals. And in the fast growing Eastern economies, growth will have to slow because of inflationary fears. For the UK, all this will combine with the effects of fiscal retrenchment as the government tries to bring borrowing under control. A double dip for the world economy is not likely because of the strength of the emerging economies. But it is well within the bounds of possibility for the UK.
3) Germany to be the Western economic superstar again. German performance, in some sense subsidised by the euro which has the same effect for the German economy that the cheap renminbi policy has for the Chinese economy, is likely to continue to be stunning. With the costs of unification gradually absorbed and a highly competitive exchange rate, Germany is setting the pace in Europe. One of the interesting elements of Germany’s recent economic success has been the role of immigrants –primarily Turks but increasingly from other countries –who now seem to be boosting the German economy in the same way that their equivalents have boosted the British economy in the past 20 years.
4) A serious economic crisis in Japan. Japanese debt is now 200% of GDP and if it grows will need foreign financing which may be difficult to achieve. It is likely that the government will have to embark on fiscal retrenchment. Meanwhile, growth in the main Asian export markets will slow and the aging population will force the government to raise the retirement age again, this time to 75!
5) Inflation to be a bit lower than is conventionally expected. The end of the inventory turnaround and the prospect of more normal wheat and cotton growing weather should bring prices of commodities down. While interest rates –raised in China again on Christmas Day –should continue to rise in the fast growing Eastern economies, they could remain flat in the US, the eurozone and the UK.
6) Another tough year for consumers. The VAT rise, combined with high commodity prices at the beginning of the year and depressed average earnings and falling employment mean that disposable income will fall. Whereas last year the fall was offset by consumers running down savings and by spending less on utility bills (at least until the cold December), this year there is not a lot of cushion left. So expect consumer spending to be flat at best and even that would be a result.
7) Online retailing has had a tremendous year in 2010 and has really become a dominant driver of consumer spending. Two new technologies which I expect to start to grab attention in 2011 are cloud computing, which in effect is renting access to your server, and ‘telepresence’, the use of HD TV to provide teleconferencing that is such high quality that it seems as if the other people are in the same room as you.
8) Banks in the UK to start lending again. UK banks have done a lot to get their capital bases restored after the problems of 2007/08. I expect them to lend more competitively in 2011 –either because they can afford to or because the government gets fed up with their monopolistic attitudes and start to adopt more aggressive policies to them.
9) A year of two halves for the UK housing market. In the first half of the year, I expect a weak UK housing market and prices could even edge down, on the back of weak disposable income. But in the second half of the year, lending could become cheaper as competition to provide mortgages heats up and this should turn the market round. Prices may be much the same at the end of the year as at the beginning.
10) Now for our infamous sporting predictions which for 2009 were 100% right and for 2010 were nearly 100% wrong. For 2011 ‐Manchester United for the league, New Zealand to beat Australia in the final of the rugby World Cup, India for the cricket World Cup. England to beat Sri Lanka but to lose to India in the two test series in the summer. Real Madrid for the European Champions League.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.