Outlook for the US and European Economies in 2010
- Recovery in final demand unlikely;
neither US nor Europe likely to see full-scale recovery -
November 18, 2009
Since spring 2009, the US and Eurozone economies have seen a partial recovery as inventory adjustments have been completed and the benefits of stimulus measures have emerged, and thanks to greater than expected growth of exports to newly industrialized countries and stability in the financial sector. However, the recent upturn is largely attributable to policy measures.
In the US, the number of persons in employment is still falling, although the pace of the decline has slowed. The anxiety regarding the financial markets has yet to be fully assuaged and the adjustment in the housing market is still in progress. In the Eurozone and the UK, the employment situation is still deteriorating and housing price adjustments are making even slower progress than in the US. The overall situation in the real economy is still severe.
Three key factors were considered when making this forecast for the US and European economies: the GDP gap, the likely results of policy measures and the situation in the financial sector.
(i) The US
Given a GDP gap of around –6% in recent months which indicates a major demand shortfall, the unemployment rate is unlikely to see a significant fall unless the US economy maintains growth well in excess of 2%. Although capacity utilization rates in the manufacturing sector have recently begun to recover, they are unlikely in the short term to recover to a level that would encourage growth in capital investment (excluding IT investment) and the fall in capital investment is likely to be prolonged.
Measures to promote car replacement, which boosted GDP in the July-September quarter of 2009 have done little more than eat into future demand and as balance sheet adjustments and the deterioration in the employment situation continue, demand will inevitably fall back in reaction. The effects of other policy measures, such as personal taxation cuts and infrastructure and environmental investment, are expected to peak in early 2010 and their positive impact on the economy will then tail off.
The fall in commercial real estate prices is accelerating. With existing loans for the acquisition of commercial real estate reaching their maturity dates and banks still cautious on lending, there is a considerable risk of a rise in the number of non-performing loans. In this case, it is possible that financial anxiety will flare up once more, especially among provincial banks, whose loan portfolios include a high proportion of this type of loan.
In the Eurozone, the GDP gap has grown to the –6% range. Given the relationship between GDP gap and unemployment, unemployment rates in the Eurozone are set to rise to around 11%. Even assuming a smooth recovery in production, capacity utilization is not expected to reach the level of 80% (at which it encourages capital investment) before 2014, and there is little prospect of capital investment growth in the short term.
Although measures to promote the purchase of new automobiles have had some success in Europe, the continued rise in unemployment means that, from the end of 2009 into early 2010, as support measures come to an end, demand is set to fall in reaction. Meanwhile, although governments are likely, sooner or later, to have to implement further stimulus measures to avoid a rise in unemployment rates, the significant deterioration in the fiscal balance of many countries in the region means that any measures implemented are unlikely to be of a scale sufficient to drive the economy forward.
The slowdown in Eurozone bank lending to non-financial corporations has become sharper. Owing to a rise in the number of corporate and personal bankruptcies, banks are likely to remain under pressure from the problem of non-performing loans. Banks in the Eurozone in particular have lent large sums to newly industrialized countries in Europe and are likely to suffer increasing problems with non-performing loans. Credit crunch is likely to hamper the economic recovery of the Eurozone.
Given this situation, the outlook for national and regional economies is as follows:
(i) The US:
Encumbered by a substantial GDP gap, the US economy is unlikely to see full-scale recoveries in employment and investment during 2010 and the mood of stagnation is likely to remain very strong. In the first half of the year, as the tailing off of the effects of policy measures becomes noticeable, the US economy is likely to slip into negative growth once more. The fresh stimulus measures that are likely to be implemented will underpin the economy during the second half of the year.
Similarly encumbered by a substantial GDP gap, the Eurozone economy is unlikely to see sustained recoveries in employment and investment and towards mid-2010, as the effects of policy measures tail off, is likely to return to negative growth. The UK economy is also likely to slow once more in early 2010, against a backdrop of household balance sheet adjustments and a deteriorating employment situation.
The risks in the above forecast are of a dollar crash, given the unprecedented scale of the US fiscal deficit, and a sharp rise in the international commodity prices, including that of oil. The reduced ability of the developed nations to generate income means that the stagnation of domestic demand may worsen as a result of the additional outflow of income.
For more information on the content of this report, please contact Takeshi Makita, the Japan Research Institute, Limited.