New macro forecast: No repeat of 2008 despite EMU crisis

The situation in the eurozone is an ongoing cliff-hanger and will cause some spill-over effects, both real and financial, in other parts of the global economy. But the overall global situation is different from 2008. The US is now in recovery and helps stabilise the global economy. The credit outlook in the eurozone is much worse than in 2008 but it is much better in the US and in Asia. Also, monetary easing is already under way in emerging economies, unlike in 2008 when policies were too tight for too long.

The recovery in the US continues but growth is modest in a historical context. Economic activity is mainly supported by exports and investments. Despite stubbornly high unemployment, core inflation, which reflects rising rent levels, will remain within the Federal Reserve's preferred inflation range. Nevertheless, we expect that the Fed will live up to its commitment to keep rates unchanged until mid-2013. By contrast, we do not expect another round with quantitative easing.

In a global perspective, the eurozone is currently the biggest source of concern. We had already a pessimistic view of the prospects for this region in August, and the absence of real measures to solve the crisis warrant further downward revisions. We lower our growth forecasts accordingly. In order for a serious recession to be avoided, the ECB has to step in. The northern part of the eurozone will barely avoid a recession, while the southern part will be unable to do so. The pipeline of budget cuts and reduced bank lending will be too heavy a burden.

The ECB will gradually have to soften its stance. In the end, it is highly likely that the Central Bank will have to make large-scale purchases of government bonds to help the troubled economies. Although the euro will still remain the currency of the eurozone, it is likely to weaken against other currencies. Relative cost and price levels will have to be adjusted downwards for the region to compete in international markets. The fear that the eurozone eventually will unravel completely will remain a concern in financial markets and is another argument in favour of the euro trading lower.

The UK is facing strong headwinds. This is primarily a reflection of the eurozone crisis, but fiscal tightening and the related domestic demand weakness also impact economic activity negatively. The authorities are facing huge challenges in seeking to balance growth, reduce the size of the public sector and cut public indebtedness. Policymakers deserve credit for their handling of the crisis during 2008-09. Against this background and given that it has room to act independently, the UK looks like a safe haven.

Emerging markets are still the main driver in a global context. So far, they have proven quite resilient to the massive problems in Europe and unusually weak growth in the US. We see few signs of serious contagion. Nevertheless, there are signs of moderate slowdown in many countries. Spearheaded by China, Asia is no doubt the most buoyant region in the emerging universe, but there are still limits as to what extent China can support global activity. Latin America is also in a relatively good shape. Our main concern is Eastern Europe, with its close links to the eurozone.

The recovery in Sweden is running out of steam but its economy is in many ways much better prepared than its regional peers. Nevertheless, firms and households have become more pessimistic, with regard to both exports and financial markets. Fortunately, there are important domestic strengths. However, these may only partly soften the blow. Given the deterioration in economic prospects, we think that the Riksbank gradually will change gear and ease rates.

Jan Häggström, Chief Economist
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