No.1 forecaster says housing rebound to fuel growth in 2012

Working his way through a plate of wild Alaskan halibut at a restaurant a couple of blocks from Radio City Music Hall in New York, UBS Securities LLC Chief Economist Maury Harris holds forth in a slight Texas twang on what he expects from the U.S. economy in 2012. It isn't a story of gloom and doom — although Harris worries that the turmoil in Europe will weigh on growth in the U.S. He sees some unexpected bright spots driving U.S. expansion and preventing a renewed downturn, Bloomberg Markets reports in its January issue. Harris's predictions matter. His team is No. 1 among economic forecasters for the world's largest economy during the two-year period ended on Sept. 30, according to data compiled for Bloomberg Markets' annual ranking. Harris, a native of Waco, Texas, says one of the most important pieces of evidence favoring continued U.S. growth is home prices. “We think that house prices have stabilized,” Harris says. That's crucial, he adds, because what makes the aftermath of the 2008 to 2009 U.S. financial meltdown different from its post- World War II predecessors is that the housing market has taken so long to recover. A loosening of bank lending standards for auto, credit card and other consumer loans is another reason for optimism, says Harris, who has been forecasting economic trends for more than three decades. No Home Loans “Banks are competing for nonmortgage loans,” he says. “You can borrow money for anything except a house.” The No. 1 firm in the world for economic forecasting is London-based Standard Chartered Plc, according to data compiled by Bloomberg. “For 2012, it's a divided and disconnected world facing many policy dilemmas,” says Gerard Lyons, chief economist at Standard Chartered Bank, the U.K.'s second-largest financial institution by market value and a firm that does much of its business in Asia. “In the West, it'll be seen as an era of austerity,” Lyons says. “In the East, it'll be investment and growth.” While the likelihood of a renewed downturn in the U.S. and Europe is low, Lyons says, the possibility exists. No Double Dip “If we were to have a double dip, it would probably be triggered by a combination of factors: a loss of confidence, an external shock or a policy mistake,” he says. “No part of the world is decoupled from any other part.” The Bloomberg Markets ranking includes predictions by 354 forecasters covering 11 countries plus the euro zone. The U.S. ranking looks at the work of 78 forecasters during the two years started on Oct. 1, 2009. It measures the accuracy of economic forecasts in 13 categories, including gross domestic product, unemployment, consumer and producer price indexes, home sales, industrial production and personal spending. The euro-zone ranking measures nine categories, including GDP, inflation, unemployment, consumer sentiment and industrial production. In the competition for the top forecasting firm, banks and research companies were ranked if they made predictions for the U.S. and at least four other countries. Standard Chartered's economics team ranked 17th of the 78 teams that evaluated U.S. economic indicators. It was No. 2 for India, No. 3 for China and No. 5 in predicting the U.K.'s performance. DekaBank a Winner The top economists for the euro zone were Andreas Scheuerle and Peter Leonhardt at Frankfurt-based DekaBank Deutsche Girozentrale; for the U.K., Adam Chester and David Page at Lloyds Banking Group Plc; for China, Ting Lu at Merrill Lynch Asia Pacific Ltd., a unit of Bank of America Corp., in Hong Kong; for Brazil, Luciano Rostagno at Banco WestLB do Brasil SA in Sao Paulo. Most of the top economists agree with Standard Chartered's Lyons that 2012 will see a wide division between East and West. And disparities will arise even within the Western economies. Harris says he sees the U.S. economy expanding by 2.0 percent in 2012, while Scheuerle of DekaBank predicts that the euro zone will grow 0.5 percent. “We're expecting a mild recession in the euro zone as a whole,” Scheuerle, 46, says. “A lot depends on the timing of the debt crisis and the political solution.” Papademos Takes Over A debt-ridden Greece had formed a unity government under new Prime Minister Lucas Papademos to address the austerity measures demanded by the European Union in exchange for more loans and debt forgiveness. As Greece moved to resolve the issues that have crippled its growth, the contagion spread to Italy, with 10-year Italian bond yields closing at a euro-era high of 7.25 percent on Nov. 9. Yields above 7 percent have already locked Greece, Portugal and Ireland out of the capital markets and forced them to seek aid. On Nov. 12, Prime Minister Silvio Berlusconi resigned; he was replaced by Mario Monti, an economist and former international adviser to Goldman Sachs Group Inc. Scheuerle, a native of Stuttgart, Germany, sees an Italian credit crunch coming. “The bank lending surveys are very bad for Italy,” he says. “That itself is a danger for euro-zone development.” Scheuerle, who's in his 11th year at DekaBank after receiving a Ph.D. in economics from Tuebingen University, says that when he started forecasting growth in the region, the primary focus was on France, Germany, Italy and Spain. Small Country Focus “We now have to monitor very closely a lot of small countries too, especially Greece, Portugal and Ireland,” he says. Scheuerle and Leonhardt say increased sales of European- manufactured goods, such as heavy machinery and automobiles, to markets in the Middle East, Asia, Africa and Latin America could help put a lid on a euro-zone downturn. “If the emerging markets are stable -- we expect a slowdown, but not a dramatic slowdown -- that should help to stabilize the European economy,” Scheuerle says. Emerging economies showed great resilience in 2011 and are likely to do so again in 2012, Standard Chartered's Lyons says. They will be buoyed “by sound fundamentals, plenty of room for policy maneuver, and confidence about the future,” he says. According to projections from the International Monetary Fund, the global economy will grow 4 percent in 2012, largely driven by emerging-market nations. World growth will be about 4 percent in 2011 and was 5.1 percent in 2010, the IMF says. Inflation Worry One negative for emerging markets, Lyons says, is inflation. Annualized 2011 inflation in October topped 7 percent in Brazil, 9.7 percent in India and 5.5 percent in China. The Chinese government has sought to quash price rises by requiring banks to put aside higher capital reserves. That could help mute economic growth. However, the main factor in holding down Chinese growth is Europe, No. 1 China forecaster Lu says. “The slowdown is mostly driven by slowing export growth because of the weakness in the European economy,” he says. Lu, 36, says China will expand by 8.6 percent in 2012 -- in line with Lyons's projection of 8.5 percent -- after growing 9.2 percent in 2011. Lu received his economics training at Peking University and at the University of California, Berkeley, where he started working toward an economics Ph.D. in 2000. “I was born in a farmers' family in a small village at the end of the Cultural Revolution, and I experienced major economic reforms during my childhood,” says Lu, who grew up in Jiangsu province. “The massive economic and social changes in my hometown in the 1980s convinced me that I should study economics.” Romer Student He says his hobby is fishing, though he's often too busy to find the time for it. At Berkeley, one of his teachers was Christina Romer, who went on to become President Barack Obama's chief economic adviser. And whereas Romer's specialty is the Great Depression, Lu's was the Asian financial crisis, which broke out when he was pursuing a master's degree at Peking University in 1997. “We discussed the Asian financial crisis every day,” says Lu, who's in his sixth year of forecasting the Chinese economy at Merrill Lynch. “My experience in 1998 was very important for me to understand 2008.” He says he was quick to see that the tumult in the U.S. financial system would have a major impact in China. China Sea Change “A week after the Lehman bankruptcy, I wrote a report forecasting that there would be a sea change in China's policies,” he says. He says he accurately predicted that China would hold off on any devaluation of the renminbi. Lu says China is ready to put in place “a big fiscal stimulus if there is another global financial crisis on the scale of 2008.” China remains the economic engine of the global economy, according to the top economists. Even the slightest slowdown there reverberates in the West, where right now “the fundamentals are poor,” Lyons says. Those fundamentals are improving in the U.S., says Harris of Stamford, Connecticut-based UBS Securities, the investment- banking division of Zurich-based UBS AG, Switzerland's largest bank. He gained his top ranking by accurately predicting, month by month, the U.S. economic expansion that began in June 2009. After adjusting for inflation, GDP climbed to a $13.34 trillion annual pace in the third quarter of 2011, topping the $13.33 trillion peak reached in the last three months of 2007. Revised U.S. Forecast The U.S. economy will expand 2.2 percent in 2012 and 2.5 percent the following year, according to the median estimate of 63 economists surveyed by Bloomberg from Nov. 4 to Nov. 9. Harris this week revised down his forecast for U.S. growth next year, to 2 percent from 2.3 percent, citing projected weakness in both the euro zone and the global economy. “We try not to be deluded by anecdotes,” Harris says. “Clients, sales-people, traders are always telling economists, ‘In my neighborhood, you got to see what's happening.' And we tell them, ‘This is why you have an economist, because we try to systemically organize evidence.' We're the nerds who go to the library to try to look up the answer.” The Texan got interested in economics in his hometown library, where at age 17 he picked up Robert Heilbroner's “The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers.” He earned a bachelor's degree in economics from the University of Texas, San Antonio, and then a master's and a Ph.D. in the discipline from Columbia University. PaineWebber Veteran Harris worked for two decades at PaineWebber Inc. and has been with UBS since it bought PaineWebber in 2000. Harris says UBS's projections are a team effort with fellow forecasters Sam Coffin, Kevin Cummins and Drew Matus. Until two years ago, the weekly statistical jam sessions included Jim O'Sullivan, who left UBS to become chief economist at MF Global Inc. O'Sullivan's work there earned him the No. 2 spot among forecasters of the U.S. economy in the Bloomberg Markets ranking. His job switch also rendered him unemployed after MF Global declared bankruptcy on Oct. 31 and dissolved after making wrong-way investments in euro-zone fixed-income securities. “It's a bit of a mess, frankly,” O'Sullivan, 48, says of the aftermath. O'Sullivan says his accurate forecasts of the U.S. economy were a matter of crunching data and then interpreting it. “For some data, it is largely a matter of judgment,” says the New York-born son of Irish immigrants, whose parents moved the family back to Ireland when he was 9 years old. “For some, we rely heavily on econometric models. Unfortunately, there are no infallible leading indicators.” The statement could apply equally to the U.S. economy and to overreaching financial firms such as MF Global. --Bloomberg News--