Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - 13th Dec 17
A Former Wall Street Veteran: Good Traders Are Born, Not Trained - 12th Dec 17
Buy Gold, Silver Time After Speculators Reduce Longs and Banks Reduce Shorts to Continue? - 12th Dec 17
Masters of Economic and Political Illusion – in Taxes, Debt, Government, and Markets - 12th Dec 17
Approved Used Land Rover Main Dealer Real Customer Buying Guide - Hunters, Chester - 12th Dec 17
Gold Price 100% Bullish Signal - 12th Dec 17
Epic Stock Market & Fixed Income Bubble Will Not End Well - 12th Dec 17
Bitcoin can be stolen. Although Can’t be hacked - 11th Dec 17
Have Stocks Reached A Permanently Rigged Plateau? - 11th Dec 17
Trying To Beat The System Is A Fatally Flawed Investment Strategy - 11th Dec 17
Is This The Beginning Of The Next Silver Rush? - 11th Dec 17
The Dow Gold Ratio - 11th Dec 17
Evidence of a Stock Market Top Mounting - 10th Dec 17
Bitcoin Doesn’t Exist – Forks and Mad Max - 10th Dec 17
Bitcoin Doesn’t Exist – Putting the Banks Out of Business - 9th Dec 17
China’s Struggle for Market Economy Status - 9th Dec 17
Is Gold Really Strong? - 9th Dec 17
Bitcoin Parabolic Mania - 8th Dec 17
SPX Make a 61.8% Retracement - 8th Dec 17
Gold, Stocks and Bonds - The 3 Amigos Update - 8th Dec 17
Gold Stocks Break, Gold to Follow - 8th Dec 17
4 Charts That Show How Trump Tax Cuts Will Trigger A Recession - 8th Dec 17
Precious Metals Breaking Down! 3 Amigos to Abort? 4 Horsemen to Ride? - 7th Dec 17
Bitcoin Just Smashed Through $12k… Wait, $13k… Now $14k… This Is Getting Ridiculous! - 7th Dec 17
Stock Market Tops Look Like This - 7th Dec 17
Crude Oil, Oil Stocks and Invalidation of Breakouts - 7th Dec 17
Bitcoin Doesn’t Exist – 2 - 7th Dec 17
British Pound Sterling Volatility In Crucial Week of Brexit Talk - 6th Dec 17
Day Trading vs Swing Trading: Which One is the Better Strategy? - 6th Dec 17
Crude Oil and Negative Divergences - 6th Dec 17
EU Bailins Coming – 114 Italian Banks Have NP Loans Exceeding Tangible Assets - 6th Dec 17
Bitcoin Doesn’t Exist - 5th Dec 17
Advantages of Car Insurance to Protect a Vehicle - 5th Dec 17
How High Will Gold Go? - 5th Dec 17
The Loonie Takes Flight -- BUT a "Labor Miracle" is NOT the Reason Why - 5th Dec 17
The True Meaning of Bitcoin's 'Success' - 5th Dec 17
Gerald Celente: Middle East Wild Cards Could Bring Down Markets, Drive Up Gold - 5th Dec 17
Silver’s Positive Fundamentals Due To Strong Demand In Key Growth Industries - 4th Dec 17
Stock Market Positive Expectations, But Will S&P 500 Continue Higher? - 4th Dec 17
Bitcoin Achieved What The Gold Market Never Could & Never Will? - 4th Dec 17
Stock Market Top Distribution Starting - 4th Dec 17
Understanding Real Time Forex Trading - 4th Dec 17

Market Oracle FREE Newsletter

Traders Workshop

Eurozone Economy Heading for Hard Landing- Economic Forecast 2008

Economics / Euro-Zone Mar 04, 2008 - 02:46 PM GMT

By: Dr_Krassimir_Petrov

Economics

Best Financial Markets Analysis ArticleEconomic reality will likely prove forecasts of major international institutions about Europe's 2008 growth prospects wrong. So, let us first see what they think; then we will see what I think and why.

A number of major institutions have provided their 2008 Eurozone economic forecast. Interestingly, many of them just recently (December 2007) revised down their forecasts. Here is a quick survey: 2.1% by IMF – revised its 2008 growth forecast for the Eurozone down from 2.5%; 1.9% by OECD; 2.0% by ECB, the midpoint of their range, down from previous midpoint of 2.3%; 2.0% by EU Commission; 1.8% by ING Financial Markets. 


Still, until the end of January, most have only modestly lowered their economic forecasts from about 2.4% in 2007 to about 2% in 2008. They see a Eurozone slowdown, maybe 0.3-0.4% lower than 2007.

I see a Eurozone hard-landing. I see major recessionary forces that forecasters conveniently downplay or ignore. I see the 2008 Eurozone economy in a tailspin. I see it on the brink of recession in early 2009. I believe that they all these “reputable” international institutions are too complacent and detached from reality.

A 1-2% slowdown is definitely possible. Even a cursory look at the latest Eurozone soft-landing in 2001 suggests that it is possible. For example, a 4% growth in 2000 was down to barely 0.5% by 2002. The point is that a 2% drop in growth in just one year is perfectly normal. Thus, while this is certainly possible, the big question is whether it is likely.

The issue really boils down to this: will Eurozone's growth rates in 2008 shave off just 0.3-0.4% or more like 1.5-2.0%. In disagreement with all major institutions, I believe in the second. I have ten good reasons to make this strong claim. So here they are.

1. Strong Euro . Over the last couple of months, the Euro has risen a lot. The Eurozone is export-driven, so this chokes the export sector. Currency hedging still largely mitigates the problem; not so in 2008. The ECB is not likely to take measures to weaken the currency. Thus, in 2008 the Euro is likely to get much stronger relative to the dollar. Just watch it happen. 

2. Tight Credit . Somehow, major institutions explicitly assume that the Credit Crunch will not spill over into the real economy. This is what they assumed also for the U.S. economy. The U.S. reality proved them dead wrong, and so will the European reality. Only this factor alone could easily slow growth with 1%, possibly even more 

3. Rising Oil Prices . True, oil prices in euro have not risen as much as in U.S. dollars. Still, they are up close to 50% in 2007, from about 40 Euro at the beginning to about 60 at the end. This has got to hurt the economy at some point, while Peak Oil will make sure that oil prices will remain stubbornly high despite pronounced economic weakness in the U.S. and Europe.

4. Rising Gas Prices . Putin really enjoys his energy grip over Europe. RIA Novosti reported on November 21 that “ Gazprom intends to raise gas prices for Western Europe by 60% in 2008. Deputy CEO Alexander Medvedev, head of Gazprom Export, said on November 20 that gas prices for Western Europe might grow from the current $250 to $300-$400 next year. ” This has got to hurt Europe's economy. 

5. U.S. Hardlanding . The U.S. economy is rapidly decelerating. Whether it avoids recession or not is irrelevant. Personally, I believe that it is already in recession. In either case, slowing U.S. demand for European exports is certain. I see a U.S. hardlanding and a stronger negative effect on the Eurozone economy. 

6. Bursting Bubbles . Major real estate bubbles are already bursting in the U.K., Ireland, and Spain. Smaller ones in France, Portugal, Italy, and Greece are just popping. By now, U.S. current experience should have convinced everyone that bursting real estate bubbles could drive an economy into a tailspin surprisingly fast. Moreover, drivers of Eurozone aggregate demand are countries with huge current account deficits: Spain - $126B, Britain $87B, Italy - $48B, and Greece $42B. Not surprisingly, these countries have wild real estate bubbles driving their demand, just like in the U.S. When their bubbles burst, the demand will evaporate.

7. Rate Hikes in the Pipeline . The ECB began its monetary tightening in December 2005. It ended its tightening cycle in mid 2007. Such monetary policy effects are usually felt strongest with a 12-24 month lag. The tightening has barely taken effect so far. It is in the pipeline and will have its strongest impact in 2008. 

8. Stubborn ECB . The ECB is stubborn in its stance. In its December meeting, it did not cut rates. Moreover, it reiterated its strong anti-inflationary stance. Whether it cuts rates in March 2008 or in June 2008, its effects will not be felt fully until 2009. So, there is no monetary help in the pipeline at this moment.

9. Elevated Euribor . Euribor is the Euro interest rate that European banks charge each other, the equivalent of LIBOR for U. S. Dollars. Since the August Credit Crunch, the Euribor has been elevated 50-90 basis points above the ECB benchmark rate. This, however, is equivalent to the ECB having raised it benchmark rate by another half or three-quarters percentage points. Its decelerating effect will be felt in full force in 2008.

10. Comatose Bond Markets . Europe's junk bond market is comatose. There has not been a single junk-bond issue since August. Even governments have major funding difficulties. Here is what the Financial Times reported on December 3, “ A severe bout of illiquidity has hit eurozone government bonds, threatening to impair the ability of some governments and other borrowers to meet their funding needs in coming months, … ‘ European government bond markets are facing challenges they haven't done for decades,' said Steven Major, head of fixed-income strategy at HSBC ”.

I believe that these are major factors that will affect Europe's economic growth in 2008. By far, the list is incomplete. The anecdotal evidence is there to fill a dissertation: major strikes in France, massive fires in Greece, LIBOR daily spikes of 20-50 basis points, collapsing Spanish economy, sharply lower consumer and investor confidence in Germany and France, etc.

Undoubtedly, most of my arguments rest squarely on monetary, financial, and credit issues. This is for a good reason that may escape the North-American reader. The European financial system is fundamentally different from the U.S. financial system. In Europe, equity markets are not as important as in the United States. Instead, the European financial system is heavily dependent on bank credit. Therefore, the European economy is much more vulnerable to bank problems than the U.S. economy. 

The European economy is likely to surprise downward in 2008, and so are the European equity markets. Therefore, expect a full-blown equity bear market, although I would say that at this point the bear market is firmly entrenched. 

Investment Advice : Conservative investors should cut down their long European equity exposures. Aggressive investors should accumulate gold and short major European indexes.

Dr Krassimir Petrov ( Krassimir_Petrov@hotmail.com ) has received his Ph. D. in economics from the Ohio State University and currently teaches Macroeconomics, International Finance, and Econometrics at the American University in Bulgaria. He is looking for a career in Dubai or the U. A. E.

Dr Krassimir Petrov Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife