Disintegration fears are picking up in the euro zone
28-11-11
- The Chart of the Week shows business confidence and real GDP growth in Belgium. The Belgian economy experienced a cumulative 4.3% contraction in real GDP during the 2008/9 recession. Nonetheless, the recovery has been more rapid than in many other euro zone economies. Nonetheless, this did alleviate investors concerns about the political situation in Belgium. Belgium has been without an elected government for almost one and half year and desperately needs a new budget to consolidate the deficit and to introduce some reforms. Last week it appeared that market participants threw in the towel with regard to the Belgian political situation. Belgian government bond yields rose sharply during the week: the 10-year yield gained to 5.8% from 4.8% the week before. However, at last Belgian negotiators managed to agree on a new budget this weekend. The new budget includes austerity measures that should drive the deficit/GDP ratio down to 2.8% next year. Nevertheless, the outlook for the Belgian economy has worsened, which could make it difficult for the new government to reach this goal. The Belgian business confidence indicator fell to -12.2 this month, suggesting that the economy will face stagnation in the near term.
United States
- As expected the Congressional Super committee failed in its task to find 1,000 - 1,500 bn US dollar in budget cuts for the coming 10 years. Furthermore, the discussion has started in Congress about extending the payroll tax cut that was enacted late 2010 via President Obama's stimulus plan. The Congressional Committee on Taxation estimates that the payroll tax break costs almost 112bn US dollar in tax revenue in 2011. Nevertheless, next year is an election year and it will be difficult to rein in the tendency of politicians to give hand-outs to voters.
- Another positive aspect for consumers is that inflationary pressures are clearly receding. The CPI for October which was released two week ago indicated that the year-on-year rate in the headline inflation has started to fall: from 3.9% in September to 3.5% in October. Looking forward, as energy prices have stabilised it seems very likely that the headline rate of inflation will continue to fall. Whereas we are still estimating an average 3.1% CPI rate in 2011 we are also expecting a fall in inflation towards an average of 2.0% in 2012.
- We continue to expect a sort of muddle through/growth stagnation scenario for the US economy for the coming few quarters. Average GDP growth is expected at 1.7% for 2011 and 1.3% for 2012.
Euro zone
- The euro zone faced intensifying disintegration fears last week as contagion was spreading rapidly from the periphery to the core.
- Euro common bonds are often cited by economists as a solution to the crisis. At least one AAA-rated member state appears to have taken a less hardened stance against common bonds last week. The Austrian Chancellor Faymann last Friday said that euro common bonds should not come without rules, while previously he had been against it outright. According to media sources, he made additional remarks to an Austrian press agency yesterday and appeared to have suggested that he is in favour of common bonds and for a bigger role of the ECB.
- Effectively, Germany has only two relevant comrades left to prevent common bonds and the ECB's nuclear option and these are the Netherlands and Finland. It seems likely that the growing pressure on Germany to get on board of the euro common bond project may have contributed to the effective failure of a German bond auction on Wednesday. As concerns over mounting liabilities for Germany, the Netherlands and Finland are increasing, the result was a massive sell-off in German, Dutch and Finnish bonds. The 10-year German yield jumped from 1.9% to 2.25%.
- How it all ends with the euro zone is still very unclear, but one thing appears more certain: the euro zone economy is likely to face a recession in the short term. Accordingly, whereas we are expecting real GDP to average 1.5% in the euro zone in 2011, we are also expecting real GDP to contract on average by 1.0% in 2012.
- Although inflation has been 3.0% in October, we are expecting inflation to fall towards 2.0% in the first half of 2012 before sliding further.
United Kingdom
- Last week it was confirmed that the UK economy expanded 0.5% in the third quarter of this year. The details of the GDP report indicated that the government and inventory accumulation were the main drivers behind this growth.
- Moreover recent business confidence figures are suggesting that the economy is risking to fall in recession.