SEB says slow­down in Europe gained strength since sum­mer

The Pak Banker - - Front Page -


The global eco­nomic cri­sis re­fuses to go away. The slow­down in Europe has gained strength since sum­mer, with in­creased risks of global con­ta­gion.

The de­sired re­cov­ery dy­namic is be­ing de­layed be­cause of con­tin­ued pri­vate and pub­lic sec­tor debt con­sol­i­da­tion in the West­ern world.

In ad­di­tion, there are var­i­ous sources of po­lit­i­cal un­cer­tainty con­nected to the euro zone cri­sis, fis­cal pol­icy is­sues in the United States, China’s lead­er­ship change and the Mid­dle East sit­u­a­tion. The sit­u­a­tion may de­te­ri­o­rate fur­ther un­less op­ti­mism in­creases in the cor­po­rate sec­tor.

We are now see­ing di­ver­gent growth rates in the world econ­omy. On the one hand, for ex­am­ple, the US econ­omy is on firmer ground, and we be­lieve that growth in emerg­ing economies in­clud­ing China has bot­tomed out. The US, with a growth rate of 2.4 per cent in 2013 and 2.7 per cent in 2014, will help drive the global econ­omy and fi­nan­cial mar­kets. We also ex­pect China to be a sta­bil­is­ing global force, once its growth re­bounds to about 8 per cent and the re­form poli­cies of the new Xi ad­min­is­tra­tion be­come clearer. On the other hand, a neg­a­tive eco­nomic pol­icy dy­namic is dom­i­nant in the euro zone. Growth is de­pressed in spite of sup­port from the Euro­pean Cen­tral Bank (ECB) and some im­prove­ment in im­bal­ances re­lated to com­pet­i­tive­ness, cur­rent ac­count and government fi­nances. Gross Domestic Prod­uct (GDP) in the 34 coun­tries of the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment (OECD) will grow by 1.3 per cent in 2012, 1.6 per cent in 2013 and 2.1 per cent in 2014. Over­all, down­side risks will pre­dom­i­nate due to the euro zone cri­sis. Low re­source util­i­sa­tion will push down the rate of pay in­creases in the OECD coun­tries. Be­cause of this, OECD in­fla­tion will re­main sta­ble at a low 1-2 per cent, de­spite “money print­ing” by cen­tral banks.

The cen­tral banks in the US, Ja­pan, the United King­dom and the euro zone are step­ping up their ef­forts and set­ting new his­tor­i­cal records in mon­e­tary stim­u­lus, among other things by pur­chas­ing gov­ern- ment se­cu­ri­ties. The world’s big­gest eco­nomic ex­per­i­ment is thus con­tin­u­ing. Dur­ing the past five cri­sis years, cen­tral bank bal­ance sheets have ex­panded by more than USD 11 tril­lion, or 20 times the GDP of Swe­den. The pur­pose of th­ese quan­ti­ta­tive eas­ing mea­sures is to soften the im­pact of pub­lic and pri­vate sec­tor debt con­sol­i­da­tion in or­der to pre­vent de­fla­tion­ary spi­rals from spin­ning dan­ger­ously out of con­trol, while en­sur­ing the sup­ply of liq­uid­ity in the fi­nan­cial sys­tem. Mon­e­tary stim­u­lus poli­cies are un­likely to threaten price and fi­nan­cial sta­bil­ity. The risk of th­ese mea­sures is in­stead that they may dis­rupt pric­ing mech­a­nisms in fi­nan­cial mar­kets, mak­ing ef­fec­tive re­source al­lo­ca­tion in the econ­omy more dif­fi­cult. An­other pos­si­ble risk is that the im­pact of cen­tral bank poli­cies may ease pres­sure on the po­lit­i­cal sys­tem to im­ple­ment the nec­es­sary bud­get mea­sures and re­struc­tur­ing poli­cies. The dif­fer­ences in mon­e­tary stim­u­lus be­tween coun­tries may also con­trib­ute to un­de­sired ex­change rate shifts that will lay the ground­work for pro­tec­tion­ist ten­den­cies. Over­all, we ex­pect that due to con­tin­ued weak growth, low re­source util­i­sa­tion and ul­tra-loose mon­e­tary poli­cies, the his­tor­i­cally low in­ter­est rate en­vi­ron­ment will per­sist. De­spite prob­lems on both sides of the At­lantic, we an­tic­i­pate that be­cause of stronger US growth, the euro will weaken against the dol­lar, trad­ing at USD 1.22 one year from now and at USD 1.15 in two years.

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