The global economy has no choice but to continue with deleveraging across 2012, according to predictions by Russell Investments.
The asset manager’s global investment strategists also anticipate Asia and the US driving a “modest” recovery in the world economy.
Pete Gunning, global chief investment officer at Russell Investments, says: “It took three decades for the developed economies to borrow too much money and it will take years to pay it back.”
Gunning points out that balance sheet recessions tend to be followed by drawn-out and below-trend recoveries. He also predicts that 2012 will be marked by lower standards of living, high unemployment and lower returns because of this.
“As we look ahead to 2012 we anticipate continued volatility, especially as Western democracies reconcile the need for austerity with the need to support economic growth and provide for rising outlays on entitlements,” the economist adds.
However, his outlook predicts that the US will continue to see a square-root-sign-shaped recovery next year. This will take the form of “gradually improving” US economic data, ongoing strength in the country’s corporate earnings and growing expansion in private investment.
Russell Investments also expects China to engineer a soft landing thanks to its recently-launched easing cycle, which will allow Asia to remain one of the key drivers of global economic growth.
But this positive sentiment sits alongside the ongoing eurozone debt crisis. The fate of the euro will be one of the main influences on market sentiment next year.
“While we are more confident on the US and China forecast with each data release, we are acutely aware that forecasting political outcomes is very difficult,” Gunning warns.
“We believe that Europe will remain a source of systemic risk.”
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