The 2012 Outlook for The Netherlands and Europe (part II): a decisive year

This outlook reflects my personal opinion and should not be considered as an investment advice. I don’t take any responsibility for failed investments that were based on my predictions.

This is the second part of my Outlook for the year 2012. Again it is divided in a number of topics.

The exchanges

For the European exchanges 2011 has been a lost year with substantial losses at the most important indexes of Europe. This is largely caused by the mounting uncertainty on the stability of the Euro and the European banks and by the fact that the leading European nations suffered relatively little pain since the crisis started in 2008.

Most important European indexes (all pictures courtesy of www.iex.nl):

IBEX Madrid, Spain

AEX Amsterdam, The Netherlands

CAC40, Paris, France

Dax, Frankfurt, Germany

FTSE100, London, United Kingdom

 General performance European stock exchanges:

Performance in 2011 of the European leading indexes
Click to enlarge

The US indexes performed slightly better in general. The Dow Jones Industrial index showed some growth in 2011 and the Nasdaq Composite showed a small loss. But also here the results can hardly be called comforting.

Dow Jones Index

Nasdaq Composite Index

The US economy is generally in a situation of stabilization and stagnation.While the companies in the data economy (Groupon Inc (GRPN), LinkedIn Corp (LNKD), Facebook, Netflix Inc (NFLX)) attracted very much attention from the media and the blogzone, their general performance at the stock exchanges was poor (except for Facebook, whose IPO is expected in 2012). While Groupon relatively stood its ground with ‘only’ 19% loss YtD , the performance of LinkedIn (-33% YtD) and especially Netflix (-74%YtD) was disastrous.

General performance US exchanges:

Performance in 2011 of the US leading indexes
Click to enlarge

I don’t expect the circumstances on the European and US stock exchanges to improve much in 2012. There will be green shoots again, but the general color will be red in 2012. Especially the strong Euro-countries in Europe will suffer from the pain that has been postponed in 2008/2009.

The manufacturing industry, the financial services industry and exports will be hit hard as a consequence of stalling demand at the domestic markets, in the Euro-zone and abroad (the US and the BRIC’s) and that will have its influences on the Dutch, British, French and German stock exchanges. For next year I expect again losses between 10% and 20% at the aforementioned European exchanges.

I expect somewhat better, but still mediocre performance at the American exchanges in 2012.

The economy (economic policy)

I expect the leading European economies to shrink substantially in 2012; by at least 2%, but maybe even more. And in contrary to the official planners of the Dutch Central Planning Bureau (www.cpb.nl), I don’t expect the economy to bounce back mid-2012. I think this recession might last well into 2014 and it might take at least 10 years before the economy returns to 2006 growth-figures again.

These leading economies would shrink autonomously, due to stalling demand in the importing countries (The PIIGS, the former Eastern Block and even the BRIC’s) and a lack of consumer trust at the domestic markets. This effect will be reinforced by the continuing financial problems in the Euro-zone

On top of that, the governments of the leading Euro-countries Austria, France, Germany and The Netherlands will suffer from the fact that they played hard-ball with the PIIGS countries, concerning the 2011/2012 budgets and state debt. Now these leading countries must prevent at all cost that their own government budgets and state debt get out of hand, as this would cause outrage under the leaders and the population of the PIIGS-countries.

At least the Dutch government has issued a program for €18 bln in austerity measures + €10(?) bln in additional austerity until 2015. I expect Austria, Germany and France to follow the Dutch example of additional austerity measures. The consequences of such austerity is that these economies are choked in a coma and get in a negative death spiral (see figure).

Economic Death Spiral

This figure shows the negative impact of austerity measures in a time of economic depression. But unfortunately the leading countries have passed the point of no return. They have to make cutbacks to remain credible in the Euro-zone.

I am even less optimistic about the economies in the PIIGS-countries. These will suffer enormously from the brutal austerity measures that are forced through by the IMF and the other Euro-zone countries. Expect shrinking economies of -3% to -7% in the PIIGS-countries with Greece. Portugal and Spain as negative outliers. Italy and Ireland will do slightly better,  I presume.

One exception: if the Euro-zone decides to start a Marshall-plan 2.0 for these countries, than this would be an enormous economic boost for the PIIGS. And just today  (December 29), I was very pleased to learn that Angela Merkel, chancellor of Germany, seems to move in that direction: she launched the idea that European development funds that had not been spent, could be used to rebuild the economies in the PIIGS-countries. That is an idea that is worth exploring. I give her a tip-of-the-hat for this, if this idea gets a follow-up in Europe.

Unemployment

I’m very clear about unemployment. In 2012, I suspect it to rise by at least 3%-4% in The Netherlands and by about 2% in Germany. Rising unemployment will probably even be higher in the other Euro-zone countries, where the PIIGS will probably be the negative outliers; not only in sheer numbers, but also in the percentage of increase.

To start with the Dutch situation that I know best. The CentralPlanning Bureau (www.CPB.nl) wrote in November 2011 that the unemployment should have gone up in 2009 by at least 4% as a consequence of the 4% decline in GDP:

After the credit-crisis broke out at the end of 2008, the Dutch GDP dropped by an unprecedented amount. According to similar situations in the past, unemployment should have increased by at least 4%, but it did rise by not more than 1,5%.

The explanation for this surprisingly little increase was lying largely in the behavior of companies. Companies kept more personnel in service than could be expected, based on development of production. They could handle this financially. The Dutch business community was relatively in good shape when the crisis started; in much better shape than in earlier crises. Profits were high, the net cash position favorable.

Well, the good shape, that the CPB speaks of in this snippet, is gone now. Many companies, like the one that I work for, wrote red figures over the last three years since 2008. And although some companies still managed to make a decent profit during this period, I don’t expect the Dutch companies to maintain their excess personnel when the current recession proves to be a nasty one. The period of mass lay-offs that I noticed during this year has only just started, is my conviction.

And while Germany is currently still the ‘golden child’ in Europe with its massive exports all over the world, I cannot imagine that it can maintain this status in 2012. Germany will have to step back slightly and this will have immediate consequences for the German employment situation.

And remember: these are about the strongest countries in Europe.

Consumer confidence

Here is the picture that says it all about consumer confidence:

Data courtesy of Eurostat (http://epp.eurostat.ec.europa.eu)
Click to enlarge

Even in the most succesful Euro-country Germany, the consumer confidence is moving in a downward reaction beyond 0% (0% = as many positive as negative people), albeit less substantial than in other Euro-countries. 

However, it needs to be said: the consumer confidence indicator is an indicator that can go down very quickly, but it can also go up again instantly as it is measured subjectively.

Still I presume that the trend for 2012 will be pointed downward. The results of a declining economy, growing unemployment, stalling demand from the importing countries inside and outside Europe and the continuous soap opera around the Euro will have its toll on consumer confidence.

But of course less confident consumers will remain using normal daily consumption goods and food stuffs. And people won't stop shopping for clothes or presents, during holidays and end-of-season sales periods. 

What does happen, however, is that people spend less money during these typical sales periods.They will also postpone spending on expensive luxury goods and durable household appliances that don’t need to be replaced immediately. They will also spend less money in hotels, pubs and restaurants. This will have its effect on industrial production and the food-and-beverage industry.

Summarizing: 2012 will be a hard year for most European countries, but it will also be a decisive year. If the government leaders take the right steps, like Angela Merkel seems to do right now, it can be a fresh new start for Europe and the Euro-zone.

If the leaders fail, however, it would put Europe deeper in a long-lasting depression with devastating results for all European countries.