MacroScope

No swift turnaround in euro zone

MacroScope is pleased to post the following from guest blogger Sarah Hewin. Sarah is senior economist at Standard Chartered Bank and here outlines why she sees no swift turnaround in the euro zone economy.

Overnight indexed swap rates –- which I prefer to Libor, given high liquidity premia — are indicating a tightening of monetary conditions from Q1 next year. But I expect policy rates to stay low through 2010.

True, there have been some signs that the worst of the euro zone recession is past -– rising PMI indicators, improving expectations, a pick-up in exports and orders. Nevertheless, the turnaround in sentiment has been relatively recent (mostly in the last month or so, compared with clear signs of a U.S. improvement since early in the year) and remains choppy, with German businesses still downbeat, particularly on the current situation.

It has come as shock to euro zone policymakers that their recession has been deeper than the profligate Anglo-Saxons. Euro zone GDP is down 4.8 percent from its peak, so far, compared with a fall of 3.2 percent in the U.S. and 4.1 percent in the UK. Worse, the inventory overhang in the euro zone has been slow to correct. Yesterday’s GDP figures showed the drag from inventories at just -0.5 percent since the recession started, significantly less than in the U.S, and UK, which suggests a further de-stocking hit to euro zone GDP in Q209. The downturn in euro zone employment is also accelerating and the recent recovery in consumer sentiment has stalled.

Euro strength poses an additional deflationary risk. My colleagues and I see the euro averaging stronger than $1.50 in H209, an appreciation since Q109 which would nullify the most recent 50bps cuts in the refi.

Waiting for the G20 to….?

Finance ministers and central bankers from the G20 meet this weekend in the English countryside to discuss the world’s financial and economic crisis. With this in mind, MacroScope asked a number of economists what they want to see from the meeting and the G20 summit to follow later and what they expect to see.

The answer, in short, appears to be that much is needed but not much expected.

Paul Mortimer-Lee, head of market economics, BNP Paribas:

“There will be progress on agreeing that regulation needs to be more effective and more effectively co-ordinated on a global scale but I am unconvinced we are going to go a long way further.  Some populist posturing on bank bonuses etc should be expected. The less is achieved in other areas the more this will get played up. On bank recapitalisation, they will all agree strong capital is a good thing, but in no way do I expect a concerted plan — it’s driven by events and the exigencies of the local banking system.

“I would like to see progress on the international financial architecture/the IMF and its resources. Maybe we’ll get some new facility and some agreement on more new cash … but a radical overhaul requires the power structure to be rejigged — more power to the (emerging economies) and less to Europe. This is not something European politicians will want to be high profile when it comes out.”