2012 – Another New Year, and a review of the one just gone

As you read this column, another year has just turned the corner – and probably not one that many people will be sad to leave behind; so perhaps it’s a hearty goodbye to 2011 from most of us, and a warm hello to 2012.

Although 2011 was in all manner of ways a difficult year, it was also a momentous one. With general elections behind us in both Gibraltar and Spain, together with several new governments in other European countries, we are all going to have to get used to the new order. And that is not to mention the ongoing convolutions of the “Arab Spring” which rumbled inexorably into an Arab summer, autumn and winter as it moved from Tunisia and Egypt, through Libya, the Yemen and Syria. And not just in political terms; there will be economic consequences too.
And talking of economics, 2011 was certainly a year to remember – or, I guess, forget depending on your point of view. In several respects I believe history may record that it was the most challenging year from a financial perspective since the world went into economic crisis in 2008. And it would not be surprising if 2012 doesn’t continue along a similar track.

So what happened in 2011 that turned life on its head for so many countries? Simply put, the fact that there was too much unaffordable debt around started to dawn on the markets, the speculators and eventually the people. Several countries in Europe came close to defaulting; others, specifically Greece, avoided a formal default only through a clever form of words and the necessity for the rest of the Eurozone to start bailing out before the ship sunk.

The underlying incentive was that by helping out, the other European governments were acting to prevent the “contagion” spreading to other states, including their own. As it happened, the EU’s inability to move quickly enough meant that this contagion occurred anyway, so we ended the year with several countries at risk of a Greek-style crisis. At the same time various ratings’ agencies chose to reassess the economic prospects of a number of sovereign states with the result that the debt rating of several was downgraded.

Nor was this limited to Europe – even the national debt of the US, the largest economy of them all, was downgraded during the past year as their politicians indulged in a ruinous “Mexican stand-off”.

Across the world, but particularly in the Eurozone, banks continued to struggle. They were simultaneously expected to repair their balance sheets and pressured to increase their lending book. Time and again over the last year we have seen this same contradiction: state sponsored bailouts of banks across Europe whilst those same institutions were being “encouraged” to bolster economic recovery by lending to domestic customers. It is no wonder that little forward progress was achieved.

Economic growth rates in Europe are very low at best and in several cases, they ended the year in negative territory. For countries such as Greece, negative growth – or recession – appears to be an almost permanent feature of their economy. It is difficult to see how recovery is going to come any time soon to such countries.

Commodity prices have risen – and in the case of energy in particular, this has had a dramatic effect for domestic and business consumers as they have suffered enormous increases in costs. Taken with the resulting increases in food bills as well as fuel, many consumers struggle to understand how the official – and relatively low – inflation rate is calculated.

As investors will know only too well, 2011 saw many of the world’s major stock markets languish. Currency exchange rates have also been in the news during the year just past. For those of us here in Gibraltar who generally earn pounds but also spend euro over the border in Spain, we have seen the exchange rate locked in a tight range during most of the year. Despite all its problems, the euro has remained stubbornly strong against certain currencies, including sterling. Looking at the same issue from a global perspective, exchange rate “pairs” such as the US dollar/ Chinese yuan have become far more significant as the US struggles to work its way out of recession and China seeks to maintain high rates of growth.

It is also interesting to see the spectre of the Europeans approaching countries such as China and Brazil for assistance by buying Eurozone bonds. It’s an example of the new world, or at least a couple of the emerging BRIC economies, coming to the rescue of the old. Who would have thought it?

So what does 2012 hold? As regular readers will know, I am wary of making detailed predictions. You won’t be reading my guesstimates of the exchange rate or the price of gold in these columns. Still less will I get involved in politics and you certainly won’t catch me predicting a royal baby in the year ahead!

But as I write this at the end of 2011, there are some areas in the financial world in which I can predict developments in the year to come with some confidence.

First of all, what lies in store for us here in Gibraltar? For some time, I have been writing that although we are in no way immune to the financial crisis engulfing Europe, overall we have proved to be fairly resilient given the modest size of our economy. I don’t see any reason why this should change in the year to come although we may experience a greater impact from developments in Spain. A new Spanish government was elected last November and how Spain deals with its economic woes is going to be critically important.

In Europe as a whole, it’s clear that the national leaders will have to continue fire fighting across the continent. With some exceptions, most countries are in a similar position. Staggering levels of national debt combined with low or negative growth rates are likely to dominate the headlines in 2012 as they have in the year just past. As a result interest rates are likely to remain low for the foreseeable future although, should the spectre of inflation return, increasing rates cannot be ruled out.

In Gibraltar our other main concern is the state of the UK economy, for that is what determines important issues for us – interest rates and the crucial exchange rate with the euro, and indeed other currencies. In Britain, as elsewhere in Europe, the government will continue its efforts to reduce the burden of national debt whilst seeking to inject some much needed growth into the economy. It will be a difficult juggling act.

Once the winter months are behind us, the Diamond Jubilee should cheer everyone up across the Commonwealth. Later in the summer, the London Olympics should provide an enormous boost to the economy and hopefully to Britain’s standing around the world. Early reports are very favourable; the infrastructure appears to be ahead of schedule. We must all hope for a decent haul of medals and records too.

And speaking of records, your diligent scribe is due to hit a significant personal milestone in the coming year that no amount of denial can do anything to alleviate. One wonders where the last 50 years have gone!

So as we all recover from the excesses of Christmas and New Year, welcome back to Gibraltar in January. Let’s all hope that the winter – and indeed the economic freeze – will be short and sweet. From the viewpoint of the financial world it must be goodbye, and good riddance to 2011. Hello and welcome to 2012; please be kinder to us all.
Whatever 2012 brings, I hope sincerely that it proves to be a good one for you. On behalf of all my colleagues at Sovereign Trust here in Gibraltar, I wish you and your families a very happy and indeed prosperous New Year.