2012 Economic Outlook

 By Latha Ramchand, Ph.D., Dean of the C. T. Bauer College of Business at the University of Houston

Time magazine chose The Protestor as its 2011 Man of the Year. From the Arab Spring to Occupy Wall Street, from the Congressional debt impasse to the European financial crisis, 2011 witnessed big changes, some with a happy ending, some without, but most of which have a ‘to be continued’ ness about them. We saw procrastination in our leaders like we have not for a long time. This theme will continue to haunt us for a while and through 2012. As rioter protests remain unresolved, as the super-committee in the U.S. dissolves, as Europe struggles with the survival of the Eurozone, there seems to be no clear end in sight, not at least until certain other questions are resolved.

2012 is a global election year as many countries prepare for changes in leadership. Given that not much happens in an election year, the road ahead will be rocky for sure. What will the French elections bring in May? Will there be a change of power in Russia? Which way will the U.S. sway in placing their November ballots? Will China manage to eke out growth or will inflation rear its ugly head in the first quarter of 2012? Will the change in leadership in China be a smooth transition or will the 180,000 “mass incidents” reported in 2011 be reflected in one major incident of dissatisfaction? Will Greece default when their debts come due in March?

The answers to these questions and more are will be part of the fast changing puzzle driving the global economy in 2012. If there is a theme, it is that uncertainty is the new normal.

At the same time, there are bright spots that suggest cautious optimism. For one thing, the latest ADP numbers in the U.S. suggest improvements in the unemployment situation. Unemployment fell to 8.5% in December, the lowest rate since February 2009 and 200,000 jobs were added in the private sector. Sectors like energy, healthcare, information technology, and teaching are projected to grow and, hence, boost hiring. Developments in energy, will dominate the global landscape as emerging markets’ consumption and production changes. Shale drilling is likely to cause a major regime shift in U.S. energy dependence and is likely to be a major theme for 2012.

The data on U.S. manufacturing costs looks promising. Labor costs are declining in the U.S. compared to other countries and this could mean the start of a new era in manufacturing. Based on a recent report in the Wall Street Journal, U.S. labor costs are 13% lower today compared to their levels a decade ago, while they are higher by 2.3% in Germany and 18% in Canada under the same comparison metrics. The appeal in bringing manufacturing back to the U.S. lies in the technological innovations that go with it. If indeed manufacturing begins to move back to the U.S. from China and India, we could revert to the ‘us’ that we used to be as in Thomas Friedman’s ‘This Used to be us’.

Then there are those predictions based on hard numbers – for the first time, there will be in 2012 more millionaires in Asia (3.5 million millionaires) than in the U.S., that tax rates will go up, that the Chinese economy will be hurt by a real estate bubble given the amount of lending that has occurred in 2011, that GDP growth in India will slow down….

What 2011 taught us was that we have to learn to be nimble and learn how to learn. We need to embrace change and continually adapt. Having the courage to change, will be the currency in demand in 2012.

Latha Ramchand is Dean at the C. T. Bauer College of Business at the University of Houston. She has previously served as Associate Dean, Programs and Administration and Associate Dean of Graduate and Professional Programs.  She is also a Professor of Finance at the C.T. Bauer College of Business and teaches in the areas of Corporate and International Finance and Risk Management. She received her Ph.D. in finance at Northwestern University where she attended the Kellogg Graduate School of Management.