The global economy threw a lot of surprises our way in 2011, enough to make Americans downright cranky. Though no one can predict with any certainty whether there will be more severe shocks to the world financial system this year, many indicators point to a continued slow recovery. The Business Record recently spoke with Bob Baur, chief global economist with Principal Global Investors, to get his take on what we can expect in 2012.

Baur said one of last year’s biggest surprises was the downward revision in August of the government’s growth estimate for gross domestic product (GDP) for the first quarter of 2011 to just 0.4 percent, down from an initial estimate of 1.9 percent.

“That was a real shocker,” he said, noting that the lower estimate seemed out of line with several positive manufacturing and purchasing surveys that were indicating a higher potential for growth.

“That set in some real fears about a potential U.S. recession in the second half of the year, fed by the worsening European debt crisis and the U.S. debt ceiling deadline,” Baur said. “It just created an extremely foul mood and was part of the negative attitude that led to (declines in) all stock markets around the world.”

According to the latest Bureau of Economic Analysis estimate released Jan. 27, real gross domestic product — the total output of goods and services produced – increased at an annual rate of 2.8 percent in the fourth quarter of 2011. In the third quarter, real GDP increased 1.8 percent.

Though Baur believes the current expansion is sustainable, growth could be slower this year than in the fourth quarter, he said. His team of economists predicts GDP will grow at a rate of 2.5 to 3 percent this year. “If we get to 3.25 percent, that would be pretty good,” he said. “That’s certainly lower than the rate we saw in the ’80s and ’90s. Part of the reason for that is the labor force is growing more slowly now.”

Retail sales will be an important growth factor. The National Retail Federation came out with its 2012 forecast in mid-January, predicting that U.S. retail industry sales growth will shrink to 3.4 percent this year, hampered by the lingering housing slump. Sales will total $2.53 trillion in 2012. Sales in 2011 increased by a greater-than-projected 4.7 percent from 2010. By comparison, retail sales have averaged an annual growth rate of 3.1 percent in the past decade, the organization said.

“Retail sales for December were a little weak,” Baur said, “but we expect some acceleration toward the end of 2012 as states pick up spending. We believe that the conditions that came from state layoffs and shrinking state governments will go away.”

Baur said he thinks that the housing industry will begin a weak rebound this year. For the first time in several years, growth in housing construction should be a positive contributor to GDP, rather than subtracting from it, he said.

“It’s no longer shrinking, so it’s no longer a head wind to growth,” he said. Prior to 2007, the United States added more than 1 million households every year, but that number began shrinking in 2009. “We think we could come close to 1 million this year. With the increased demand, we think we could work through some of the inventory.”

Volatile energy prices could be another hindrance to growth. “If we saw oil go up another $20 to $25 (per barrel), that would certainly be a hindrance to growth,” he said. “We don’t anticipate that happening, but with the volatility in the Middle East, you just never know.”

Following the election in November, confidence should improve once people know who will occupy the White House next year.

“People don’t stay depressed forever,” Baur said. “With the election there will be some more clarity. The nation will probably move toward a moratorium on regulations if there’s a Republican president, or they’ll adjust if the current president is re-elected, and expect more regulations.”

The European debt crisis is probably the biggest global threat to U.S. growth, but Baur said he doesn’t expect any dramatic changes in that scenario this year.

“We think the more likely scenario is just continuing to muddle through,” he said. The European Central Bank’s commitment of 489 billion euros ($645 billion) should buy enough time for the so-called GIPSI countries (Greece, Ireland, Portugal, Spain and Italy) to restructure, cut costs and become more competitive.

“I think the other thing that’s worrying globally focused investors is China,” Baur said. “China’s growth has slowed. They tried to prick a real estate bubble and they succeeded, but we think there will be a soft landing and that China will continue to be a driver of global economic growth.”