Business Forecast and Economic Outlook


London Business Forecast and Economic Outlook 2012 (A slightly late Christmas Carol)

We had a packed house on Tuesday December 6th when this always popular annual event visited London. It was an eclectic group of Speakers; or shall we call them Christmas Ghosts, visiting the Booth Scrooges?

1. The 'Academic Ghost' - John Huizinga, Walter David “Bud” Fackler Distinguished Service Professor of Economics, Chicago Booth

2. The 'Business Economist Ghost' Piero Ghezzi, Head of Economics and Emerging Markets Research, Barclays Capital

3. The 'Practitioner Ghost' - Henry Ritchotte, Chief Operating Officer, Corporate and Investment Bank, Deutsche Bank

Of course Economics is called the dismal science even at the best of times, and these are not the best of times. But there was still some optimism from each one of the three speakers.

In terms of US Real GDP Growth in 2012 all predicted some positive growth:

- John +2.2%

- Henry +1.8% (DB)

- Piero +1.7% (Barclays)

This compares to others who also predict growth at about the same level:

- IMF WEO +1.8%

- The Economist Survey +1.8%

- OECD +2.0%

John spoke of Okun's Law which, in usual Chicago fashion, looks empirically at the relationship between the change in unemployment rate as a function of the change in GDP. In fact, looking at past Christmases it looks like the US unemployment rate is higher than would be predicted from Okun's Law. Current unemployment in the US is over 9% whereas Okun's Law would predict less than 7% (looking at 60 years of data) or at least less than 7.5% if looking at data over the last 20 years (the turbulent period since this writer was at Booth).

Anyway, is this good news? Can we expect unemployment to drop now? Or is the level of structural unemployment now truly higher than in the past? Is this higher than predicted unemployment due to significantly increased unemployment benefits in the US? John and the other speakers were at least optimistic about the US labour force's ability to react to changing economic conditions.

The Ghosts of Christmas Present were not as enthusiastic about Euro-land. Here John opted not to give a prognosis but our other two ghosts were forthcoming with Henry predicting negative growth of 0.5% in 2012 (vs. +1.6% in 2011) and Piero predicting down 0.2% (vs. +1.5% in 2011). Note these are their firms' predictions.

All highlighted the usual suspects; the Euro zone problems including:

- Sovereign debt defaults

- Bank failures

- Liquidity crisis

- Credit crunch

- Breakup of the Euro

All agreed that the Euro would probably muddle through. However the bankruptcy of a member or two was certainly possible.

There was some optimism around global growth with Piero predicting +3.3 in 2012 (vs. +3.6% in 2011) and Henry predicting +3.4% (vs. +3.7% in 2011). Chinese growth, while lower than previous years, is still expected to be in the 8% range.

When the Ghosts were asked if we had learned our lesson Henry and Piero both admitted that they had learned from this, their 4th or 5th crises of their careers so far. John had the last word and he predicted that while we, the government and other players had probably taken the necessary steps to avoid this particular crisis from happening again, we would however, probably fail to predict, or prepare for, the next crisis.

On that happy note we all wished each other season's greeting over drinks.

Bruce Rigal
Distinguished Executive in Residence
Chicago Booth, London Campus