As I write in a recent update to my 2012 outlook, I expect the global economy to experience one of two scenarios this year: a continuation of the current slow growth environment, which I believe is the most likely scenario, or a slide back toward recession.

While I believe the odds favour slow growth, i.e. what I call “The Great Idle,” investors may be wondering what they should watch for in the second half of this year to confirm which scenario will play out.

Both my midyear outlook piece and a similar new paper from the BlackRock Investment Institute offer a number of signposts, most of which have to do with policymakers successfully addressing fiscal problems and spurring growth.

Signposts for Slow Global Growth

  • The United States: Politicians in the United States resolve, or appear willing to resolve, the fiscal cliff situation ahead of when it’s set to hit in January. In addition to policy, watch leading indicators, specifically the Chicago Fed National Activity Index, my preferred measure to forecast economic activity. A reading around zero suggests a continuation of the slow growth environment.
  • Europe: Eurozone policymakers fix their region’s shaky banking system, outline a credible plan for a closer fiscal union, resolve to bring down Italy’s debt refinancing costs and implement structural reforms to spur growth.
  • China: China’s efforts to ease monetary conditions payoff. A soft landing would equate with 7.5% to 8.0% growth.

Signposts for a Global Recession

  • The United States: Policymakers in the United States fail to resolve, or appear unwilling to resolve, the fiscal cliff situation ahead of when it’s set to hit in January. US economic growth continues to weaken. Rising tax rates pose the largest danger.
  • Europe: Deposit withdrawals in Southern Europe turn into a full-fledged bank run (watch deposit outflows from southern-tier countries), a closer fiscal Eurozone union appears unlikely, Italy’s debt refinancing costs remain high and structural reforms aren’t implemented.
  • China: Growth falls below the 7% threshold and or lending falls.
  • Emerging economies in general: Indian and Brazilian growth continues to decelerate.

Ultimately, I expect we’ll see more signs of slow growth than of a global recession. But as markets are likely to remain volatile as long as the outlook for the global economy stays uncertain, I continue to advocate that investors consider a relatively conservative portfolio that includes:

1.)    High-dividend paying stocks accessible through the iShares High Dividend Equity Fund (NYSEARCA: HDV) and the iShares Emerging Markets Dividend Index Fund (NYSEARCA: DVYE).

2.)    US spread products such as municipal and investment grade bonds, accessible through the iShares S&P National AMT-Free Municipal Bond Fund (NYSEARCA: MUB) and the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEARCA: LQD).

The author is long HDV, MUB and LQD.

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.