There is not going to be an implosion of the euro area but there are considerable, negative trends for Europe in the near term, said George Buckley, chief economist at Deutsche Bank in the UK in an interview with the Caymanian Compass.
Mr. Buckley noted that Europe has already shown massive political will to get out of the sovereign debt crisis. “We think that will continue; we don’t think that Greece will default in a disorderly fashion.”
According to the central view of Deutsche Bank’s model forecast, the most likely scenario will see Greece receive the sixth tranche of lending before 10 October, in time to repay a Euro 1 billion coupon payment. However, there will be no respite with an 8.1 billion redemption payment due in December.
“A lot needs to happen in order to achieve this model forecast of no implosion and an orderly default by Greece,” Mr. Buckley said, including the approval of the European Financial Stability Facility, the ratification of a new Greek loan, as well as private sector involvement. At the same time the risk of a political misstep has increased, he conceded.
The EFSF has reached its limit, he said, because it was always designed to be a small economy bailout fund and never meant to bail out the likes of Italy and Spain. But Deutsche Bank does not think that Italy and Spain need the same scale of support relative to their bond markets as Greece, Ireland and Portugal. “So it is probably unfair to list what a full programme would cost for Italy and Spain,” Mr. Buckley said.
There is also more room for further action as the ECB balance sheet has more scope for growth compared to the Fed’s or the Bank of England’s.
He further believes the markets are understating the importance of what some countries, such as Italy, have done in terms of the sheer scale of structural reform and spending cuts.
Mr. Buckley particularly approves of the front loading of the austerity measures, in that the fiscal impulse is much bigger in the first years of a plan than in the final years, something that will ultimately prove to be growth positive, he said.
While he believes things will end up in a positive way for Europe, a recession remains a high risk. Overall Deutsche Bank’s central forecast is only positive, relative to the possibility of a significant drop in GDP and a second recession. A recession, of course, would make it all the more difficult to achieve fiscal balance again.
Giving a general outlook, he said, Latin America and Eastern Europe will do reasonably well with 3 per cent to 5 per cent growth rates. Asia is going to do much better, he forecasted, despite a slowdown that can be expected for China with a GDP of 6 per cent to 7 per cent at the start of next year. But Chinese GDP is going to pick up again throughout the course of 2012, he added.
Mr. Buckley is more positive on the US than on Europe. Deutsche Bank is expecting 2 per cent to 2.5 per cent growth in the US, while in Europe growth is currently at 0.8 per cent and the risks are heavily weighted to the downside.
“It looks like the purchasing manager indices, which we think are great surveys are pointing to a contraction in Q3 and Q4,” he said, adding however that such a contraction will be relatively brief.