2012: A Better Year, Unless Europe's Debt Blows It Up

Last New Year's Day, most economic forecasters were predicting a good year ahead. But 2011 turned out to be another disappointment for stock investors and home sellers, and a discouraging time for job seekers.

Now, as 2012 begins, economists are hoping their crystal balls are working a bit better. Most are seeing a brighter picture.

A recent Associated Press survey of leading economists showed a consensus estimate of 2.4 percent GDP growth in 2012. That would top 2011, when growth ran at an estimated 2 percent.

If the consensus forecast were to come true, the growth would be strong enough to whittle down the unemployment rate of 8.6 percent. The rate already is down to its lowest level in nearly three years, and based on recent improvements in weekly jobless claims, appears likely to slip further.

In the year ahead, uncertainty remains as to whether the housing market will rebound (and how the election year will affect politicians' focus on that issue). There's also the question of whether European leaders can contain the region's debt crisis, or if it will evolve into a more dire fiscal situation than 2008.

Real Estate: A Continued Struggle

Most economists doubt growth will be robust enough to spark a significant rebound in the profoundly depressed real estate market. The housing sector seems to be unable to do much beyond taking one step forward and one back.

Last week, the National Association of Realtors said the number of people who signed contracts to buy homes increased in November to the highest level in a year and a half, but at the same time, the number of canceled contracts also rose.

On balance, it appears "real estate will continue to struggle not only in 2012, but well beyond," Lance Roberts, CEO and chief strategist of Streettalk Advisors, said in a written assessment.

Most forecasters also predict interest rates will stay low in 2012, and consumer inflation will settle down. Those factors should help keep the U.S. economy growing, says IHS Global Insight chief economist Nariman Behravesh.

"Growth momentum has picked up modestly," he wrote in his 2012 outlook. "Consumers seem willing to spend and businesses are more disposed to hire — albeit cautiously."

But economists are also quick to point out that 2012 is a tough year to predict because of political and foreign wild cards. For one, congressional dysfunction could worsen in a presidential election year. Some observers fear there could be a number of market-rattling political crises on Capitol Hill, such as the ones in 2011 involving the debt ceiling and payroll tax holiday.

Another unknown is the Chinese economy, which has been slowing. Over the last couple of decades, China's annual growth rate of around 10 percent has helped prop up the global economy. But now its housing sector is looking troubled, and that threatens continued expansion.

"Chinese growth can be expected to hold up at around 8 percent and further bolster Asian growth prospects — provided China's housing downturn does not evolve into something much worse," Behravesh says.

The European Question

But the even bigger fear involves the European debt crisis, whose outcome is unpredictable. It's possible that European leaders are now coming up with ways to manage the problem. In the best case scenarios, the debt mess may linger as a long-term headache, but won't get out of control.

The worst case scenarios are dire. Economists generally say there may be a 1 in 5 chance that the situation will blow up, with some European governments defaulting on their debts. That could trigger a collapse of the banks that hold those government bonds.

Government defaults and bank failures could spark a chain-reaction meltdown that could spread financial chaos around the world. Many economists say that if that were to happen, a 2012 financial crisis would make the 2008 meltdown look mild.

On the other hand, if Europeans do get a handle on their debt troubles and global interest rates and inflation stay low, the United States and other countries could see more growth than is now expected.

"There are plenty of economic, political, social and policy risks for 2012. They are not all negative. It is quite conceivable that not only the U.S. will continue to surprise on the upside, but others could, too," such as Brazil and India, Jim O'Neill, chairman of Goldman Sachs Asset Management, wrote in a letter to investors.