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Economic Turbulence Forecast for 2012

There are encouraging signs for the world's largest economy as 2011 comes to an end. American consumers are spending more, the housing market is improving, and employers are laying off fewer workers.

But the unresolved debt crisis in Europe, the slowdown in China and U.S. spending cuts pose a serious challenge for policy makers as 2012 begins.

High unemployment in the United States, rising debt and Congress' inability to do anything about it were major stories in 2011.  But some bright spots are emerging as the year comes to a close, according to George L. Perry, a senior fellow for economic studies at the Brookings Institution.

"One was the export sector which grew really very well. Another area was construction outside of home building. Business construction was picking up and construction in particular areas like commercial."

U.S. unemployment is at its lowest level in more than two and a half years, and consumer confidence is rising. But there are dark clouds ahead as the New Year begins.  China, the world's fastest growing economy, is slowing down, and Europe's debt crisis shows few signs of easing.  

"We export a great deal to Europe," Perry points out. "And if Europe falls into another recession, that export growth is going to end. And that will affect jobs in the U.S. and cause the U.S. to move towards recession."

Rising inflation and the slowdown in Chinese manufacturing have already curbed demand for some commodities.  But the slowdown is due in part to Beijing's efforts to prevent its economy from overheating, adds Perry.

Reflecting on the global uncertainty, World Bank President Robert Zoellick urged Europe and its biggest trading partners to act responsibly.

"Europe has to rescue Europe, okay? And it's very important. If there's any message when I'm asked, 'Well, what can the U.S. do and what can China do?' The best thing they can do is clean up their act at home, be a source of growth at home, and, secondly, be a source of confidence to the market."

Zoellick is encouraged by ongoing reforms in China aimed at reducing the country's reliance on exports, but he warned U.S. lawmakers against further delays in dealing with the nation's rising debt, now close to $15 trillion.

"The downgrade of America from triple A didn't affect the finances today, but it may be one of those events people look back on 10 years from now and say, 'Did they get the warning? Did they pay attention or did they continue to do what they were doing?'"

Unless leaders are willing to make the tough decisions needed to stabilize the global economy, Zoellick and many leading economists say problems in Europe, the U.S. and China could coalesce into a "perfect storm" in 2012 that could rival the financial crisis of 2008.

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