Outlook for the US and European Economies in 2010
— Recovery in the short term, but risk of further downturn remains —
June 11, 2010
Although the US and European economies are set to recover in the short term, Europe's debt problem means there are still dark clouds on the horizon. The European debt problem has exposed structural problems with the euro, and the debt problems of southern European countries have exacerbated the existing problem of bad debt due to the collapse of the housing bubble, with the result that the euro now faces its greatest challenge since its establishment.
However, given the substantial demerits of a collapse of the euro, the mobilization of policy measures such as large-scale quantitative easing by the European Central Bank and a devaluation of the euro is likely to be effective in containing financial system fears and steadying the euro system [Main Scenario].
Meanwhile, even if the European debt problem quiets down, there are still many obstacles to stable growth. They can be summarized as follows:
(1) The United States
(i) Risk of a further downturn
Although overall employment figures began to recover early this year, private-sector employment has seen little growth and as autumn (when the reaction to hiring for the census will emerge) approaches, employment is likely to remain sluggish. Unless employment growth of 100,000 jobs per month becomes an established trend, the risk of a further economic downturn will remain.
(ii) Sustainability of consumption growth
The growth in consumer spending seen to date is due largely to a rise in propensity to consume, based on rising share prices, etc. Rising unemployment is expected to lead to sluggish income growth and, with little hope of a further rise in share prices or housing prices, it is unlikely that consumption growth will accelerate.
(iii) Effects of economic stimulus measures tailing off
Spending under economic stimulus measures worth a total of $787 billion peaked in the first quarter of 2010 and will be declining from now on. The scale of the anticipated further economic measures is likely to be no greater than around 1% of GDP for the whole of the 2010-12 budget period, so that the scale of measures will fall sharply from October 2010 onwards.
(iv) Continuing stagnation of commercial real estate and housing markets
Commercial real estate prices will continue to fall. Commercial real estate loan defaults are putting pressure on small and medium financial institutions. In the housing market, the discontinuation of government subsidies for home buying is likely to cause sales to stagnate. Foreclosures are still at a high level and continue to exert downward pressure on housing prices.
(i) Economic impact of the European debt problem
The countries of southern Europe are unlikely to avoid deterioration of their economies as a result of large-scale fiscal restraint. However, the fall in the value of the euro against the backdrop of this problem will have a buoying effect by promoting export growth and the eurozone is likely to avoid the bottom falling out of its economy.
(ii) Continued deterioration of employment
Employment will continue to deteriorate in the eurozone. Even in countries that are able to avoid deterioration of employment through the implementation of policy measures, a rise in the labor share will bring increased pressure for adjustment of personnel expenses. In addition to the continued deterioration of income and employment conditions, the reaction as the impact of the stimulus measures introduced in 2008 tails off means that the stagnation of consumer spending is likely to be prolonged.
(iii) Policy of the new UK government
The UK needs to substantially reduce its fiscal deficit, which is the highest among the developed nations. However, in view of the disagreements within the coalition government, it is not certain whether this can be achieved. The reaction to the discontinuation of the stimulus measures introduced in 2008 will become apparent and the boost to the economy provided by the current weakness of the pound will be limited.
Given the above conditions, the economic outlook is as follows:
(i) United States
Although the economy is recovering, the continued stagnation of income conditions, among other factors, makes a full-scale recovery unlikely. Rather, as the reaction to the effect of stimulus measures emerges, it is likely that the growth rate will slow into the end of the year.
In the eurozone, the tailing off of stimulus measures and the deceleration of the economies of southern European countries that are trying to reduce their fiscal deficits, make negative growth likely into the autumn this year. From autumn onwards, however, the weakness of the euro is likely to give a further boost to exports to countries outside the eurozone and, thereafter, the economies are likely to maintain a positive, albeit low, growth rate. In the United Kingdom, too, economic growth is likely to remain slow against a backdrop of household balance sheet adjustments, the stagnation of the financial sector (one of the country's main industries) and increasing fiscal restraint.
The risk in this outlook is that Europe will fail to contain financial system fears. In that case, the bottom is certain to drop out of the eurozone economy. Increasing funding shortages in the Central and Eastern Europe and Latin America and the deceleration of Chinese exports, among other factors, present a risk of a second global economic deceleration [Downturn Scenario].
For more information on the content of this report, please contact Takeshi Makita, the Japan Research Institute, Limited.