Global forecast update: Growth upgraded, but problems remain
Europe: Credit crunch tempered…
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• We have upgraded our forecasts for global growth in response to better data and a further easing of policy. In particular, the success of the European Central Bank’s long term liquidity operations and surprising resilience of Germany mean that we expect the recession in Europe to be shallower than before.
• However, it is still a weak picture. We do not see US activity taking off as the de-leveraging process has further to run. Much of the recent improvement in growth reflects an inventory cycle as the factors which held the economy back last year fade and go into reverse.
• In the Euro area the latest bailout of Greece is doomed to fail, being based on the mistaken belief that austerity can create growth. Consequently we see Greece leaving the Euro in 2013 following a change of political direction after fiscal slippage and increased demands for more austerity.
• The principal risk to our central outlook is the familiar one of increased oil prices with the current threat coming from the stand-off over Iran’s nuclear programme. The energy tax is already rising, and a spike in prices could send the world economy back into recession.
Europe: Credit crunch tempered
• The European credit crunch appears to have been tempered by the 3-year liquidity auctions from the ECB. Longer term cheap financing to the banking system seems may have averted a European Lehman Brothers event, helping to boost investors’ confidence and lower the cost of borrowing for the Spanish and Italian governments.
• However, banks are still under pressure to deleverage, and with fiscal tightening taking place for the next 2-3 years, we continue to forecast recession in the Eurozone, especially in peripheral Europe.
• Core Europe appears to be more resilient than previously forecasted, though will probably struggle to take off given such weak demand from its neighbours. Nevertheless, it appears that the outlook has improved from a few months ago, which reduces the likelihood that the ECB will conduct quantitative easing.
The views and opinions contained herein are those of the Kevin Murphy and Nick Kirrage, Specialist Value UK Equity Fund managers and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
For professional investors and advisers only.This document is not suitable for retail clients.
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Source: IFAWorld – Schroders