An unlikely new consensus about the world economy seems to be emerging 2013, it is now quite widely believed, is going to be quite a bit better than 2012.
Beyond blind faith in the idea that bad times always come to an end, eventually, it’s not entirely clear what’s caused this change in sentiment.
And though it is certainly quite hard to think the coming year could be any worse than the current one, sunlit uplands are not yet apparent in many of the lead indicators outside equity markets.
If America plunges over the fiscal cliff in the next few days, then all bets will be off in any case. The new mood of optimism may therefore be more a case of wishful thinking than anything else.
All the same, among business leaders and bankers I’ve been speaking to, the mood is unmistakably more upbeat and this in itself can be a meaningful starting point for renewal.
Animal spirits are stirring. If companies can be coaxed out of hibernation, so that they start spending and investing in a meaningful way again, we’ll certainly be on the long road back to recovery.
The belief that possibly they can is already reflected in equity markets, which, on the whole, have done well this year, particularly in Europe , where there have been some very substantial gains.
Equity prices seem to be signalling quite a strong cyclical rebound at some stage next year. Are they right to do so, or with bond yields so low, is this upswing no more than a renewed hunt for yield, with little broader economic significance?
Before analysing the outlook in more depth, it is first worth reflecting a little on what went wrong over the past year. This turned out to be a much grimmer 12 months than most mainstream forecasters were anticipating, though again it is not entirely clear why they thought things would be any better.
All the same, to my mind the truly remarkable thing about the past 12 months is what didn’t happen, rather than what did. As it turned out, none of the apocalyptic disaster scenarios that might have come to pass actually materialised.
There was no Eurogeddon, nor was there any hard landing in the Chinese or other emerging market economies .With Israel apparently backing away from military action against Iran, the immediate threat of another oil price spike has also receded.
There is plainly one exception to this list of avoided catastrophes the US fiscal cliff has not yet been settled, and continues to cast a shadow across the world economy.
Yet, though the past 12 months have been difficult, they failed to live up to the doom-laden expectations of the “twenty twelvers” as the year in which the world would implode. Nowhere is this more apparent than in the eurozone, which has again managed to defy the sceptics by surviving the year intact.
So much so that, when asked shortly before Christmas whether there were any glimmers of hope in the world economy, Mario Draghi, president of the European Central Bank, replied yes, “the eurozone”.
Self-serving this might have been, but it is not entirely ridiculous. One of the reasons why business leaders are feeling a bit more positive about the new year is that Europe seems to be riding out the storm.
That doesn’t mean the crisis is over, but some of the tail risks of disorderly break-up do seem to have been removed. For now at least, survival of the euro is no longer an issue.
European leaders point to declining current-account deficits and improving labour competitiveness in the eurozone periphery as evidence that the reform agenda is working as planned.
The eurozone is righting itself, they insist. We’ll see, but personally I’d be amazed if there wasn’t some fresh flare-up in the next 12 months, with one of the major economies, such as France, possibly at its centre next time.
There are two ways of correcting a current-account deficit. One is to export your way out of it, and, to be fair, there has been a significant growth in exports in most periphery countries over the past year.
External indebtedness is thereby reduced, easing the immediate fiscal crisis.
Astonishingly, even Greek sovereign debt has been revised up a couple of notches. No wonder policymakers think they are through the worst.
But the other way is simply to reduce internal demand so that imports dry up. This, I fear, is where the real “progress” in attacking current-account deficits is being made.
The same is true of apparent improvements in labour productivity and unit labour costs. With unemployment in Spain at more than 26pc, it would indeed be very surprising if Spain had not narrowed the productivity gap somewhat with Germany.
This has been quite an “achievement”, if you can call it that, but of itself it cannot deliver economic salvation. Improved competitiveness has come at a terrible price, with a whole generation lost when it comes to any prospect of full employment.
Contractionary policies across the eurozone make continued recession in the region for at least the next year a virtual certainty.
While the periphery struggles under the cosh to make itself more competitive, France seems to have adopted the opposite strategy of making itself less so, incubating an even more calamitous crisis further down the road.
So, although the eurozone is once again likely to see out the next year in its present, 17-nation form, it’s unlikely to be a happier experience. Austerity Europe has quite a number of years yet to run.
I dwell unduly on the outlook for the eurozone because, regrettably, it is likely to remain the big negative for the UK economy over the coming year.
If Europe remains moribund, there is no great cause for optimism about the UK economy, either.
Britain needs growth in external demand to rebalance away from debt-fuelled consumption, but it doesn’t look as if it will get it from Europe.
Britain also faces its own, continued squeeze on household incomes and government demand.
The economic outlook for the US looks far from uncomplicated, too. Even assuming a deal to avoid the fiscal cliff is reached over the next few days, some sort of a fiscal squeeze is already pre-cooked.
The only issue is one of degree. Ben Bernanke, chairman of the Federal Reserve, has committed to keeping interest rates low until unemployment falls below 6.5pc, but support from fiscal policy has come to an end.
US corporations have done a sensational job in expanding earnings through much of the downturn.
But now this growth is flattening out, and third-quarter earnings growth was the weakest since the recession ended.
Many companies brought forward capital spending to take advantage of tax breaks, which are now expiring. So that’s another negative for growth over the coming year.
“Obamacare” is also a potentially significant cost that will be fully felt for the first time this year. Many companies are planning to shift more workers on to part-time contracts to circumvent these costs.
The one region of the world where it is possible to be unambiguously bullish is China and South East Asia .
China has again managed to stimulate itself out of trouble, and, while many of the structural problems at the heart of the Chinese growth model remain unresolved, the economy is none the less picking up speed as the development story sweeps ever Westward.
As I say, there is still lots to worry about when it comes to China.
Consumer demand remains far too small a share of GDP, and there are also very legitimate concerns about the health of the banking system, with a significant rise in bad debts highly likely over the next year.
However, the hard landing many anticipated a year ago seems essentially to have been avoided, and the new political leadership’s emphasis on the quality of growth, rather than quantity, is, assuming it is more than just rhetoric, a very welcome development.
In any case, the idea that the BRICs (Brazil, Russia, India and China) growth story had pretty much run its course a common view a year ago has once again been confounded. Iron ore prices, which are the best barometer of the outlook for emerging markets, are already well off the bottom.
We also have a new government in Japan, voted in on an overt “going for growth” strategy. Japan , too, should therefore experience some reasonable growth over the next year.
For the UK, I’m anticipating a year a little bit better than the past one, but not hugely so. A slight triple dip may be confirmed three months into the new year, but from then on things will begin to pick up.
In fact, if you strip away declining North Sea oil production, ignore the negative impact of fiscal consolidation and factor in some inevitable decline from financial services, the performance of the UK economy doesn’t look so bad.
North Sea oil and financial services have been the two big props in the UK economy this past 30 to 40 years.
Other things need to come along to replace them, further underlining the case for much more radical supply-side reform than we have seen to date.
These are big structural challenges, which slightly take the gloss off the newly upbeat mood.
The main cause for optimism seems to lie in the assumption that we’ve had an awfully long workout already and that, eventually, the cycle must turn that and the arrival mid-year of Mark Carney as the new Governor of the Bank of England, which seems to have given everyone a psychological boost.
Nothing lasts for ever. That much is true.
But just as booms don’t simply die of old age, nor do busts. It’s naive to think that once you get a more can-do, creative Governor in place, monetary policy can be made to magic away all our problems. It cannot.
Is this the year when the great bull market in government bonds finally comes off the rails? Again, analysis of this issue rests on the old but somewhat unhelpful truism that nothing lasts for ever.
Long-term interest rates may indeed be a bit higher by the end of the year, but it is implicit in everything I’ve been saying in this article that it won’t be by much.
Normalisation in bond yields back to pre-crisis levels requires a quite pronounced economic pick-up in major advanced economies, and personally I can’t quite see where that’s going to come from.
Good luck for the new year. We are all going to need it.