2012 is going to be just as bad as 2011, if not worse.
As 2011 comes to an end, I thought I’d make some predictions for 2012. I don’t claim to be a genius soothsayer who always gets it right, but predictions can be quite fun and they’re a good way to generate debate on the big financial problems that we face.
Auto enrolment
Let’s kick off with pensions. 2012 will be an interesting year as the government’s auto-enrolment scheme is due to start at some employers.
This means that all employees at a firm will be automatically enrolled in a pension scheme unless they make the effort to opt out. I fear that the number of workers who opt out will be disappointingly high.
UK inflation
We got some good news recently when consumer price inflation fell to 4.8%. I expect that downward trend to continue in 2012. That’s mainly because the price of oil and other resources probably won’t rise by much as economic growth stays sluggish across the world. On top of that, George Osborne’s VAT increase will no longer be affecting inflation numbers as it took effect on January 1st 2011.
I would add one caveat though. If Iran and Israel go to war, the oil price will soar and UK inflation will rise too. It’s possible that some other Middle East conflict could also have a similar effect.
UK interest rates and mortgages
Given the weak state of the economy, the Bank of England is going to be reluctant to increase its base rate.
Even though the base rate will stay low at 0.5%, I think there will probably be a modest rise in interest rates for new fixed rate mortgages and some variable rate mortgages too. That’s because the banks are going to get weaker and they’ll be ever more reluctant to lend to each other. In other words, the credit crunch will probably get crunchier once more.
House prices
House prices are notoriously hard to call correctly. For what it’s worth, I think that UK house prices will stay roughly unchanged. Once you take inflation into account, there may be a modest fall in ‘real’ house prices.
Europe
Europe will remain a massive issue in 2012. I’d be delighted if the European Central Bank started printing some euros as a way to alleviate the crisis but I fear it’s unlikely.
A big part of the problem in Europe is that EU politicians are obsessed with austerity. They don’t understand that growth is an essential part of any solution to the continent’s problem. Anyway, nothing much will change on that front, austerity will continue.
As a result, my hunch is that at least one country will leave the single currency next year. That will spark further financial turmoil and increase the fragility of banks in both the UK and mainland Europe. A single currency break-up will only increase the likelihood of low inflation and low interest rates in the UK. (See postscript at the end of this article.)
United States
So what will happen in the US?
The Presidential race will be interesting. Most of the Republican candidates are complete fruitcakes, so the Republican party will eventually hold its nose and nominate the most electable candidate, Mitt Romney. That’s in spite of the fact that many Republicans loathe him.
Romney may be the most electable of the potential nominees but he’s not electable enough to win. Barring a total economic collapse, Obama will be re-elected next November.
Although you can’t rule out a massive economic disaster, the most likely scenario is modest growth in US GDP.
China
What happens in China will be crucial in 2012. The Chinese economy has been growing at around 10% a year in recent times which is an amazing achievement. However, trouble is brewing. Property prices have soared and we may see a bursting of the bubble next year. That could slow growth down to 6 or 7% a year.
Lower growth in China is bad news for the UK because it will make it harder for our exporters to sell goods there. It also increases the chances of a trade war where countries across the world introduce more tariffs on imported goods. That won’t help global growth in the end.
UK politics
Some pundits have suggested that there will be a UK general election in 2012. They’re wrong, there will be no election next year. What’s more, Ed Miliband will survive as leader of the Labour Party.
What should you do?
So having read these forecasts, is there anything you should do?
Well, I think it makes sense to try and save as much money as you can. Even if my forecasts are wrong and the economy is booming next Christmas, a little extra saving won’t have done you any harm. And it will have given you a bigger savings cushion if you lose your job or are hit by any other calamity.
But when it comes to other financial decisions, it’s probably best not think about forecasts – mine or anyone else’s. My friend Neil Faulkner is especially critical about house price forecasts as he believes they may have encouraged people to make decisions that have lost them money.
After all, you’d be pretty fed up if you read a forecast saying that house prices would fall, delayed buying a house as a result, and then saw house prices soar 20% over the following two years.
If you’re at the stage in life where you can afford to buy your first home, you should probably buy your first home. Same applies if you’re thinking about starting a family or any other big life decision.
Just be aware that meeting the costs of these decisions may not be as easy as you might once have hoped. Tough times lie ahead.
On a more cheerful note, Happy Christmas!
PS. Since I wrote this article, it's becoming clear that the ECB's massive loans to commercial banks this week are making a difference and are a quasi-QE move. This has reduced the chances of at least one country leaving the Euro next year. The Eurozone still has massive problems though and this story is far from over. There's still a good chance that we will see a break-up at some point in this decade.