Jeremy Warner: Things will be on an improving trend by the end of 2012 The Bank of England will see its inflation forecast finally vindicated (a first for recent years) as CPI inflation falls back below target with the effect of higher VAT, energy and import prices falling out of the equation. Growing unemployment will further push down on prices. House prices will also continue to fall, fed by weak demand and scarce mortgage finance. The surprise for next year will be a somewhat stronger pound. This will be partly a function of euro weakness and Britain's continued attractions as a safe haven from the euro storm. All things are relative, and against much of Europe, the UK will look comparatively stable, both politically and economically. I'm also outside the consensus in forecasting a big fall for the oil price to around the $80 mark. No market is more subject to the vicissitudes of unpredictable events than oil, so this forecast comes with a health warning. If Iran acts on its threat to block crude supplies through the Strait of Hormuz, then all bets are off. But assuming such supply constraints do not materialise, then oil will sink back to levels consistent with relatively weak global growth. Stock prices will continue to suffer as the economic data grows weaker, before picking up towards the end of the year in anticipation of cyclical recovery to close a little bit higher than they are now. Many stocks represent good value at current prices. Balance sheets are generally strong, and profits robust. Companies have prepared themselves well for difficult economic times. However, very high corporate profits at a time of growing unemployment and widespread wage restraint risk a political backlash. The heat on executive pay will continue to rise, as will union militancy. Interest rates will remain low into the indefinite future in recognition of weak demand and abating inflation. Despite disappointing growth, the UK will retain its triple A credit rating, helping to support gilt yields at near record lows. Also supporting low gilt yields will be yet more quantitative easing, which like renewed recession, can already be taken as read. The Bank of England may also need to provide some sort of substitute for the Special Liquidity Scheme to deal with a potential funding crisis in UK banking in the early part of the year. What happens to the euro is as much dependent on political as economic developments, and is therefore impossible to predict with any certainty. There was a point a month or so back, with yields on even super safe German government bonds rising above those of the UK, when I thought it was essentially all over for the single currency. But my best guess now is that monetary union will stagger on its current form for at least another year, lurching from one crisis driven summit to the next. There is no mainstream political party in Europe that provides an alternative narrative, so no obvious way of achieving an orderly break-up. None the less, widening economic divergence between north and south, with Germany still relatively robust but something close to depression in the periphery will bring mounting political and social resentment, as well as undermining fiscal consolidation plans. Even the German core will eventually be affected by the grinding recession of the eurozone fringe, prompting the European Central Bank finally to abandon its aversion to quantitative easing with a programme of substantial bond buying across all 17 eurozone nations. This should provide some temporary relief to the sovereign debt crisis, support credit expansion and provide a little extra demand. Unfortunately, it won't address the underlying causes of the eurozone crisis, and to the extent that it provides a further excuse for avoiding the main issue, might actually be a quite negative influence in the long term. Even so, it will put a rocket under markets when it happens and should at least prevent the patient dying on the table. China remains a cause for concern. No-one doubts Asia's continued capacity to expand in the long term, fuelled by fast growing domestic consumption, but where overheated property markets are concerned, there is no such thing as a soft landing. The belief that China has managed to engineer one is based on the almost certainly flawed idea that a command economy can escape the usual laws of economics. This is about to be disproved. It's presidential election year in the US, so we can reasonably expect another year of at least moderate growth from the world's largest economy. Good luck for the new year. We are all going to need it.