The Eurozone and the U.S.: A Macroeconomic Commentary

Will the current upsurge in economic activity last for years, or will oversized debt and budget deficits cause a second dip in the recession?

The recent slew of ominous data from the United States and the eurozone had quelled appetites for risk, but according to us, the current situation can be compared with the situation the market faced last year, when the economy stalled rather than slid backwards. The indicators show that the anticipated growth predicted by economists in the second half of 2011 will probably not take place. We predict that the rate of growth will be much lower: 2.4 percent growth in GDP for the U.S. and 1.5 percent for the eurozone.

It has become apparent that the levels of debt in both economies are unsustainable, and the governments involved are not doing enough to solve this mounting problem. Instead, politicians are playing a game of hot potato, pushing problems onto future politicians. By doing this, they are merely making future crises more serious. There exists a serious risk of a decade of slow economic growth and even recession.

The GDP of Portugal has shrunk for the second quarter in a row. Higher taxes and austerity measures — both conditions for EU aid — have driven the country into a full-blown recession. How can Portugal’s economic downturn affect the rest of Europe?

We don’t think that the Portuguese recession will have any significant influence on the eurozone. No doubt it will hit the exporters with interest in the country, but the country does not have the size to sway the European economy, as it represents only two percent of the eurozone GDP. The problem hinges on the effect of the Portugal collapse on Spain, where financial institutions have sunk a lot of capital into Portugal. One also has to remember that Spain’s debt is not trivial either. For now, the markets have been calm about Spain. The rate of return on ten-year bonds has been close to 5.5 percent for the past six months.

The systematic rise in interest rates in the United States is a grave warning of an economic collapse. One only has to remember the crises in Mexico, Argentina and Russia that were preceded by a tightening of monetary policy. Will this scenario unfold this time as well?

The American economy is still very fragile, as seen by the slow economic growth within the past two years. The Federal Reserve will keep interest rates low for the foreseeable future in order to foster businesses. In my opinion, a series of raises on the interest rates would be a good move, yet it is too bitter of a pill to swallow in the short run. A raise of interest rates would have a negative impact on other countries and the U.S. as well. It is therefore unlikely that interest rates will go up any time soon.

What can we expect on the EU stock markets in the second half of 2011?

The short term looks very uncertain due to the troubles in Greece and the continuing slumping economy. If our predictions turn out to be correct and Greece accepts the next round of aid and the current slump does not turn into another recession, we expect positive growth for European stocks, with an estimated growth of 15 percent in the second half of 2011. There are many fiscally strong companies in the eurozone which have suffered during the crisis because only part of their profits comes from investments outside of the eurozone.