Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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

6 Critical Money Making Rules