2012 forecast: recovery ... or recession?

• Author: Ladd, Scott
• Position: ECONOMIC OUTLOOK

Nineteenth century French novelist Alphonse Karr is credited with coining the phrase, "The more things change, the more they remain the same." When it comes to assessing the global financial picture for 2012, it's fair to say that Karr's opinion is only half right. Based on what on forecasters predicted for the United States and world economy at the start of 2011 and how they envision events unfolding this year, the script contains far more questions than answers.

Certainly, persistent high unemployment remains a problem. The debate over tougher regulatory measures has only intensified. Trillions of dollars held by American and global companies operating in the U.S. continue to sit on the sidelines, paralyzed by an uncertain financial future.

But the key actors in determining whether 2012 will be a year of global recovery or recession are changing. No longer are U.S. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Ceithner the most dominant voices in the discussion. They've been supplanted, to a considerable extent, by German Chancellor Angela Merkel and Mario Draghi, the new president of the European Central Bank.

As such, Europe has elbowed economic giants China and the U.S. from the spotlight for the moment. How the European Union and the euro zone nations resolve--or fail to resolve--their mushrooming financial challenges may determine not only the fate of the European Union and the euro, but whether a tepid recovery under way in the U.S. continues to gain steam, or slams into another recessionary wall. The chances of a global recession, according to many leading economists, are 50/50.

Euro zone summits, such as the one held in early December, have become the normf rather than the exception. And philosophical differences remain abroad on how aggressively to bail out vulnerable national economies and how constrictive or flexible monetary police should be. The fate of the euro, the common currency binding and vexing the euro zone, is unclear.

In the U.S., the picture likely will be colored by the presidential and congressional elections, with all eyes on jobs and the job creation front. Few expect substantive amendments to the current lax structure until 2013, at the earliest, and forecasts on how quickly employment levels can start to return to something closer to pregreat recession numbers tend are cautiously optimistic, at best.

Growth overall is still a question mark. The outlook in November by the Organization for Economic Cooperation and Development projects the U.S. growth rale at only 2 percent, down from a 3.1 percent forecast last May. Some economic indicators in the U.S. are starting to provide a few signs of optimism through an otherwise cloudy sky. The rate of industrial production, consumer...