Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

© 2005-2019 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