Predictions for 2012 and 2013

Source: Goldman Sachs

1. Slow Growth For Two More Years in Developed Economies

The thread holding the global economic picture together will remain one of slow, and in some cases negative, growth. Headwinds from austerity measures which have hit government spending will hit the U.S. and peer nations in Europe. Add in private-sector deleveraging, and a banking system that is on the cusp of further layoffs, and its not too bright. Goldman also sees high unemployment plaguing the advanced nation labor forces.

2. Emerging Markets Will Remain Resilient to the Challenges

Issues that are facing developed nations will not move ot emerging markets. Inflation will begin to ease and economic policy will shift further towards prevention of slow growth. That theme has already proven itself at the end of 2011, as China's central bank, the People's Bank of China, cut reserve requirements by 50 basis points at the nation's largest institutions.

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3. Europe's Crisis Will Mar Global Growth

The crisis that has enveloped Europe will not disappear at the turn of the year. Rather, Goldman believes it will continue to hold back global growth. The investment bank is decreasing world GDP forecasts by 20 basis points to 3.2% for 2012. Low visibility of a European action plan will continue to negatively effect other markets that are reliant on the continent — particularly banking sectors laden with debt from the region.

4. Recession in the Euro-area is Becoming Increasingly Likely

Goldman Sachs now predicts a baseline GDP decline of 0.5% starting this quarter through the start of 2012, which will lead to a full 0.8% contraction. That compares to some of the hardest times during the regions 1992-93 recession. Specifically, the bank now expects mild recessions in the United Kingdom , Scandinavia and parts of Central and Eastern Europe. Expansion in 2013 looks modest at 0.7%, keeping to the tune of slow growth when there is growth.

5. Equity Markets Will Have An Extremely Difficult Year

Over the coming three to six months, Goldman economists predict the Tokyo Topix, Stoxx Europe 600 and MSCI AC Asia Pacific Excluding Japan Index to all decline. Europe will be hardest hit, seeing equities shedding 16% of their value before slowly returning to levels seen today. The S&P 500 is expected to remain tepid, moving in a small range over the coming twelve months.

6. In Asia, Equities Will Fare Better

While the investment firm shirks European equities, it believes non-Japan Asia has the largest upside potential, possibly to the tune of 14% by year's end 2012. Goldman estimates earnings per share will grow 5.6% and 12.0% for the region in 2012 and 2013, respectively. The analysts reason that low current
valuations, coupled with a still favorable forecast for China will provide the boost.

7. Sovereign Debt Yields Will Gradually Begin Rising

Goldman expects that monetary policy will remain in its current iteration (read that as easy) and that inflation will be moderate. The bank believes U.S. 10-year treasuries will stay above 2% and ultimately move up to 3.3% by the end of 2013. Germany and the U.K. will also see increasing yields, while the former nation will lower its policy rates by 30 basis points.

8. Currency Movements Will Weaken the Dollar

In currencies, Goldman Sachs analysts predict a substantial weakening of the U.S. dollar as investors move to a global portfolio of bills. Specifically, the dollar will fall against the Mexican peso (to 12.50 pesos per dollar), the Chinese yuan (to 6.13 yuan per dollar) and the British pound (to 0.58 pounds per dollar). Policy action will continue to influence currency markets, which will likely benefit Asian countries like China, Taiwan and India.

9. Crude Will Hit Record Levels

Fragility in energy markets as producers have difficulty expanding, will constrain resources and lead to higher oil prices. Goldman expects this to be the case so long that emerging markets continue to grow and require greater global resources. At current price levels, demand outstrips supply. "The oil market continues to set crude oil prices too low to clear the tight physical markets, leading oil inventories to reach exceptionally low levels for the time of year," lead analyst Francesco Garzarelli writes.



10. Policy Makers Will Take Extraordinary Actions

The announcement that the Federal Reserve is working with other central banks to lower swap prices aside, Goldman Sachs sees large moves in a number

of developed economies. "We expect QE3 in the US, additional Gilt purchases in the UK and a reasonable chance of further Swiss intervention," GS lead

Garzarelli says.