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Outlook for the US and European Economies in 2011
~Period of slow growth set to be prolonged~

November 17, 2010


In the absence of any real improvement in income and employment conditions and with the benefits of stimulus measures beginning to tail off, there is a growing risk that the US and Eurozone economies will decelerate.

An examination of the extent and progress of the adjustments to household balance sheets and the housing market, with a view to assessing the downward pressures on the economy in the short term, reveals the following situation:
(i) United States: the worst of the household balance sheet and housing price adjustments appears to be over. However, the negative impact of falling housing prices is beginning to make itself felt and the adjustments are likely to continue to weigh down the economy until prospects for their completion are clearer.
(ii) Eurozone: a strong sense of procrastination over balance sheet and housing price adjustments prevails. A prolonged adjustment period could lead to a lengthy period of economic stagnation.
(iii)United Kingdom: the adjustments in balance sheets and housing prices have yet to be completed and will continue to exert downward pressure on the economy in the short term.

Given these conditions, the key factors in our forecast for the US and European economies are as follows:

(i)United States
●Employment: the mechanism of self-sustaining expansion of domestic demand, which is triggered by employment growth, has yet to be activated. Consumer spending is likely to remain weak.
●Policy measures: with the benefits of the economic stimulus measures of spring 2009 tailing off and in view of the Democratic Party’s major setback in the mid-term elections, it is growing ever more difficult for the Obama administration to implement further economic stimulus measures. The continuation of the Bush administration’s tax cuts, while helping to underpin the economy, will provide only a limited boost.
●Exports: supported by rapid growth among the emerging countries, exports are set to remain strong. The weakness of the dollar since mid-2010 will also boost exports from 2011 onwards.
(ii) Europe
●Exports: the Eurozone is likely to see continued strong exports, centering on shipments to the emerging countries. However, the lull in the depreciation of the euro will cause export growth to slow.
●Policy measures: given that fiscal austerity on a large scale is unavoidable, the economies of the PIGS are likely to see continued deterioration in the short term. Germany and the other leading economies of Europe are also expected to start implementing fiscal austerity programs in early 2011 and are highly likely to see a further slowing of domestic demand.
●Financial conditions: financial institutions show little sign of increased willingness to lend. With concern over the sovereign risk surrounding the PIGS rising once more, the risk remains that financial system fears will spread within the region.
●United Kingdom: fiscal austerity measures will begin to take full effect from 2011 and with household balance sheet adjustments yet to be completed the United Kingdom will not be able to avoid economic deterioration.

Given these conditions, the outlook for the US and European economies in 2011 is as follows:
(i) United States: with the benefits of economic stimulus measures tailing off, it is likely that improvement in income an employment conditions will remain slow and that economic growth will remain below the latent rate.
(ii) Europe: in the Eurozone, the slowing of export growth and the launch of fiscal austerity measures among the leading economies are likely to contribute to continued slow growth, in the 0-1% range. Owing mainly to large-scale fiscal austerity measures, the United Kingdom is also likely to see a further softening of its economy in 2011.

The risk inherent in this outlook is that quantitative easing in the United States will have substantial side effects. In other words, if long-term interest rates rise owing to the increased price of resources such as oil and heightened expectations of inflation, there is a risk that the stagnation of domestic demand will increase in severity.

For more information on the content of this report, please contact Takeshi Makita, the Japan Research Institute, Limited.


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