Best of the Week
Most Popular
1.Ukraine Preface, the Emerging Dynamics Of Petro-Yuan Standard - Jim_Willie_CB
2. Speculations Reversed - Gold Price Stealth Rally 2014 - Peter_Schiff
3.Bubbleberg News Drivel Masquerading as Financial Reporting - David A. Stockman
4.Nationwide UK House Prices 9.5% Inflation, Housing Market on Steroids, Help to Buy Anniversary - Nadeem_Walayat
5.How to Profit from Palladium Huge Price Surge… - Peter Krauth
6.UK Home Solar Panel Installations Good or Bad for House Buying and Selling? - Nadeem_Walayat
7.Global Gold Manipulation Update - MAP Wave Analysis - Marc_Horn
8.Ukraine Capital Controls and 200% Inflation But Still In Better Shape Than US! - Jeff_Berwick
9.The Rise of a Euro-Chino-Russian Superpower - Stephan Bogner
10.Across Europe Secession Movements Intensify - BATR
Last 72 Hrs
10 Ways to Screw up Your Retirement - 17th Apr - 14
One of Harry Dent’s Three Keys to Market Prediction is Cycles - 17th Apr - 14
Obamacare Proof Stocks - 17th Apr - 14
Gold, Silver And The Mining Sector: Prepare For A Severe Fall - 17th Apr - 14
Hidden Australian Life Sciences Bio-tech Growth Stocks - 17th Apr - 14
Disrupting Big Data Status Quo - 17th Apr - 14
What the Stock Market Bears Have Been Waiting for... - 17th Apr - 14
Copper Is Pathological and Suffers from SAD, but It Has Value - 17th Apr - 14
Old World Order New World Order, Chaos And Change - 17th Apr - 14
Even The US Government Will Abandon the U.S. Dollar - 17th Apr - 14
Gold - Coming Super Bubble - 17th Apr - 14
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14
Bitcoin Price Strong Appreciation to Be Followed by Declines? - 14th Apr 14
Greece, Turkey, We're Shuffling The Cards on Our Europe Investing Play - 14th Apr 14
Silver Price Ultimate Rally: When Paper Assets Collapse - 14th Apr 14
Get Your Share of an Extra Trillion Euros Money Printing - 14th Apr 14
Fourth Reversals in The Gold and Silver Charts - 14th Apr 14
Stock Market Nearing Rally in a Downtrend - 14th Apr 14
London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - 14th Apr 14
Four Horsemen - Top Economists Explain the Source of Our Economic Crisis - Video - 13th Apr 14
Peak Oil And Global Warming – A Question Of Culture - 13th Apr 14
The Global Banking Game Is Rigged, and the FDIC Is Suing - 13th Apr 14
College Degree Earnings Propaganda - 13th Apr 14 - Andrew Syrios
Stock Market Potential Diagonal Triangle Pattern Forming - 12th Apr 14
Ukraine Crisis – Military Flash Drive Thinking - 12th Apr 14
Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - 12th Apr 14
Gold Preparing to Launch as U.S. Dollar Drops to Key Support - 12th Apr 14
Manipulated Stocks Markets And The Empty Bag - 12th Apr 14
Stock Market - It’s Not Time to Panic… It’s Time to Buy - 12th Apr 14
Doctor Doom on the Fiat Money Empire Coming Financial Crisis - 12th Apr 14
Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - 11th Apr 14
This Bitcoin Price Rally Might Be a Fake One - 11th Apr 14
GDX Gold Stocks Benchmark - 11th Apr 14
Silver Price Finally Outperforms – How Bullish Is That? - 11th Apr 14
Limits to Employment Participation, and Societal Change - 11th Apr 14
US Moves To Restrict Travelers Taking International Flights - 11th Apr 14
Bill Gross to El-Erian: 'Come on, Mohamed, Tell Us Why' You Resigned PIMCO - 11th Apr 14
British Pound GBP/USD - Double Top or Further Rally? - 11th Apr 14
Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - 11th Apr 14
Russia Invaded Crimea and These US Energy Companies Made a Killing - 11th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

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

© 2005-2014 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

Free Report - Financial Markets 2014