Last year was a tumultuous one in many ways, with serious economic and political challenges keeping financial markets on edge for much of the year. It was only the actions of central banks to inject enormous liquidity that ultimately calmed market nerves and delivered strong investment returns in 2012.

High levels of private sector debt and policy-makers’ inability to stimulate growth, particularly in Europe, hampered global growth. Interest rates remained very low, and the US Federal Reserve, Bank of Japan and Bank of England implemented further quantitative easing measures.

Anaemic US recovery

Among major developed economies, only the US ended 2012 with any momentum, although its recovery remains one of the weakest on record. Although fiscal policy detracted from US growth, consumer spending continued to grow, supported by modest growth in employment and incomes.  By the end of the year, there were signs of recovery in housing activity, manufacturing and services.

Late in 2012, attention turned to the impending fiscal cliff – the massive tightening of fiscal policy due in January 2013. After protracted negotiations, much of the tightening was avoided, but US budget developments are likely to cause continuing uncertainty in financial markets.

The eurozone still struggled

At the end of 2012, much of the eurozone remained in recession and economic conditions on the European periphery were still catastrophic. Austerity measures in the eurozone and the UK designed to rein in fiscal deficits and stabilise public debt have achieved neither aim: tighter fiscal policy has tended to worsen economic conditions and further undermine public finances.

However, as 2012 progressed, financial markets became more hopeful of a resolution to the eurozone crisis. Markets greeted positively the massive injection of liquidity into the European banking system by the European Central Bank and, later, its announcement that it would buy European government debt.

Growth continues in China

China’s economy has slowed over the past two years, from an annual growth rate of 11.9 per cent in the first quarter of 2010 to 7.7 per cent for the third quarter of 2012. Still, China’s reported growth remains spectacular.

Concerns about future growth in Australia

Australia’s economy slowed during 2012, but still posted a respectable 3.1-per-cent growth in output for the year to September. Although still historically high, Australia’s terms of trade fell by around 14 per cent from its recent peak as prices for our key resource exports declined. These declines, and the uncertain global environment, meant capital spending plans were wound back. The mining investment boom is expected to peak sooner, and lower, than previously thought.

The Australian dollar continued to trade at very high levels against major currencies. This has helped keep inflation low and spread the benefits of the mining boom to consumers, but has put considerable pressure on non-mining exporters and industries that compete with imports.

With concerns about Australia’s growth prospects and the difficult global environment, the Reserve Bank of Australia reduced official interest rates to 3 per cent.