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Decline in Eurozone growth set to continue into 2012

ING Investment Management is warning that a combination of fiscal austerity, a lingering debt crisis and a slow down in external demand will translate into a fall in Eurozone GDP growth from 1.7 to 1.0.

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Valentijn van Nieuwenhuijzen, Head of Strategy, ING Investment Management says: “As a whole, the global economy is currently slowing down again. This is most evident in those developed market economies characterised by household and financial sector deleveraging. Nevertheless, core Europe as well as emerging markets are affected as well through a slowing of external demand. There are two broad reasons behind this. First, the oil and Japan disaster shocks have taken a greater toll on developed markets’ domestic demand growth than previously anticipated.”

“Second, there are increasing concerns about the competency of policymakers on both sides of the Atlantic to deal with the challenges facing them. In the US this has raised the prospect of more near term fiscal tightening without a solution for the long term fiscal problems, while in Europe it implies a heightened degree of systemic risk.”

The asset manager highlights that risk aversion has risen considerably of late and this potentially opens the door to a self-fulfilling negative feedback loop between financial conditions and confidence, on the one hand, and growth, on the other. According to ING Investment Management, the onus is thus once again on monetary policymakers.

Valentijn van Nieuwenhuijzen continues: “The Fed has signalled that it expects to keep rates near zero until mid 2013 whilst also adopting and easing bias with some form of QEIII now a clear possibility. Meanwhile, the ECB has stepped up its unlimited liquidity provision again and we no longer expect a rate hike this year. While this should be helpful, one should bear in mind that the effectiveness of monetary policy is still impaired.”

Looking to the rest of the world, ING IM foresees slight growth in real GDP terms for all developed markets in 2012. The strongest region is predicted to be Japan with the market bouncing back from the natural disasters of 2011, achieving predicted growth of 2.2 compared to -0.3 in 2011. Despite the downgrading of the US by S&P in the summer, the country is still expected to post an increase in real GDP from 1.6 in 2011 to 1.9 in 2012. Even the UK with its on-going domestic policy of austerity is predicted to chalk up modest growth of 1.5 in 2012 from an expected base of 1.0 in 2011.

Van Nieuwenhuijzen comments: “Our base case is now one of positive but below potential growth in developed market space for the next six quarters and we see a 30-40% probability of a double dip. The reason for holding on to our base case is threefold. First of all, recent data shows some improvement which suggests that the impact of the oil and Japan shocks is abating. Moreover, employment as well as spending on capital and consumer durables goods is still well below pre-recession levels. This implies that the room to slash spending on these items is much more limited than it was in 2008. Finally, policymakers could still come up with a comprehensive solution to the problems facing them. “

“History indeed suggests that they will once a certain pain threshold is reached. However, whether or not we are close to this threshold is still an open question.”

Elsewhere, emerging markets are predicted to continue to outpace their developed counterparts with emerging market GDP growth expected at 6.1 in 2012, compared to a world average of 3.6 and a developed market average of 1.6. The asset manager also foresees that China, the powerhouse of the East, will post figures of 8.5 in 2012. Although this represents a decrease from its 2011 levels of 9.2, this is still higher than other markets; both developed and developing.

In terms of inflation, the emerging markets are also ahead of the developed world posting a predicted rate of 4.6 for 2012 compared to 1.7 overall for the developed markets. Individually, the UK is predicted to see inflation hit 2.5 in 2012 followed by 2.0 for the US and1.9 for the Eurozone. Meanwhile, Japan posts almost stagnant levels with ING IM Global Economic Outlook foreseeing a figure of 0.1.

Next Finance , September 2011

Article also available in : English EN | français FR

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