2012 was a year of stagnating growth and fear of a eurozone melt down – but what will happen in 2013? The EDP business team looks at the economic picture for the year ahead.

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A long road to recovery?

The eurozone will continue to drag its heels in 2013, but experts think it should remain on the road to recovery.

Despite the ongoing recession in the single currency bloc, which is expected to continue into the new year, some analysts are being cautiously optimistic for the region’s prospects.

The main source of optimism comes from the actions taken by the European Central Bank (ECB) in 2012 - specifically its bond-buying rescue plan unveiled in September.

But a Greek exit from the single-currency area and further deterioration in Spain’s finances remain a threat, while forthcoming elections in Italy and Germany will show whether the current strategy has popular support.

Peter Zemcik, analyst at Moody’s Analytics, said: “While the euro area is in recession and likely to stagnate through most of 2013, reasons for cautious optimism are emerging.

“Policymakers from the European Union and European Central Bank have committed themselves to keeping the currency union together.”

The eurozone economy is expected to grow around 0.2pc in 2013, with unemployment peaking above 12pc in the middle of the year.

The ECB cheered investors in September with its bond-buying programme, which is known as the Outright Monetary Transaction and has seen the central bank buying bonds between one and three-year terms which can have no limits.

Participating countries that have their bonds bought will have to accept certain conditions which will be part-monitored by the International Monetary Fund.

The main driver of growth in the eurozone will be Germany, which is expected to grow by 1.2pc and have an average unemployment rate of 7.1pc.

However, Spain and Greece will contract by 1.5pc and 4.2pc, respectively, with unemployment rates of over 25pc in both countries.

The longest double-dip recession since the 1950s may have just ended but fears are rising that the UK economy will enter triple-dip territory in 2013.

The Bank of England now thinks it is likely the UK economy will contract in the fourth quarter of 2012, with governor Sir Mervyn King predicting a “zig-zag” road to recovery thereafter.

It recently downgraded its forecast for gross domestic product (GDP) in 2013 to around 1pc, while the government’s tax and spending watchdog is not much more optimistic, at 1.2pc.

Economists at Capital Economics are even more pessimistic, forecasting growth of just 0.2pc next year and saying there was a one-in-three chance of the economy contracting.

Fears of catastrophe in the eurozone earlier this year have died down in recent months, following actions taken by the European Central Bank (ECB) in 2012 – specifically its bond-buying rescue plan unveiled in September.

But continuing serious problems in the UK’s biggest export area are likely to hamper growth for some time.

Analyst predictions about what the eurozone economy will vary, with some predicting growth of around 0.2pc in 2013.

But Philip Shaw, chief economist at Investec, now thinks GDP in the euro area will contract by 0.4pc next year, after recent gloomy data, and as the area went back into recession last quarter.

There will be more political uncertainty next year after Italian prime minister Mario Monti announced his intention to resign, and with German elections next September.

Mr Shaw said the forthcoming elections meant the German government was taking a more conciliatory line towards Greece, with a “Grexit” – Greek exit of the euro – now looking less likely.

But it will not just be problems beyond UK borders that will drag on the UK economy next year.

Rising inflation is expected to put further pressure on Britain’s economic recovery by hitting consumer spending power. With a raft of energy bill hikes still to take effect, inflation is set to rise again next year. It will come as a blow to pensioners and savers, who have seen their incomes hit hard by rock-bottom interest rates.

But markets will be watching with interest as a new era begins at the Bank next year. Bank of Canada governor Mark Carney will take the helm next July and analysts believe he will have a more hawkish approach to the UK’s inflation target.

Experts also think it is unlikely interest rates will rise above the current 0.5pc next year. The rise of inflation will also fuel speculation that the Bank will hold off from taking further action under its economy-boosting quantitative easing (QE) programme for the time being.

The Bank recently decided to hold its quantitative easing stock at £375m, despite signs the recovery is stalling.

But Howard Archer, chief European & UK economist at IHS Global, said he believed the Bank would ultimately decide to give the economy a further helping hand with more QE.

It is not just inflationary pressures the Bank is worried about. In the latest MPC minutes, policymakers described the gradual strengthening of sterling between mid-2011 and mid-2012 as a potential “headwind” to the ability of UK exporters to benefit from a rebound in global growth.

The exchange rate has remained well below its pre-crisis level, but the pound rose from 1.10 against the euro in July 2011 to 1.28 this July, amid fears over the political stability of the eurozone. Against the US dollar it is currently at 1.62, having been at 1.44 in May 2010.

At home, Mr Archer said spending cuts, difficulties in getting credit, particularly for small companies, and muted global economic activity were also likely to hamper UK growth for some time.

Experts also believe 2013 could be the year when the UK loses its highly-coveted AAA credit rating. All three of the main ratings agencies have now put the UK on negative outlook.

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