SEB says slowdown in Europe gained strength since summer
STOCKHOLM
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.