Mid-year Outlook for the US and European Economies in 2011:
— Deceleration can be avoided, but recovery set to remain weak

The US and European economies began to recover as spring arrived, against the backdrop of the rise in share prices that accompanied the United States’ expansion of quantitative easing. Thereafter, side effects of the expansion of quantitative easing, such as a rise in food and energy prices and the appreciation of the euro, emerged, and the US and European economies slowed sharply.

The key factors in our forecast for the US and European economies are as follows:

(1) United States
●Steady capital investment: with the corporate sector holding firm, capital investment is expected to remain steady, underpinning the economy. The sharp downward trend in the commercial real estate and construction sectors is also expected to come to an end.
●Consumer spending unlikely to see strong growth: with continued employment growth, consumer spending is unlikely to see any sharp decline. However, (i) sluggish income growth owing to the easing of the labor supply-demand balance, (ii) the continued high price of crude oil and (iii) the fall in housing prices all make strong growth unlikely.
●Pressure to cut spending will weigh down the economy: given the severe deterioration of government finances, a reduction in the federal deficit is inevitable. The trend among state and local governments to reduce personnel costs and cut investment in infrastructure is likely to strengthen.

(2) Europe
●Future of the European debt problem: The Greek crisis has flared up once more. Although opinions differ as to how to respond to the crisis, it is likely that the EU and IMF will eventually provide additional support, on condition that Greece takes further measures to reduce its fiscal deficit, and that a severe negative impact on the eurozone economies will be avoided. Meanwhile, the risk that the crisis will spread to Spain persists.
●Motive power of the German economy: Germany’s exports, which have been the driving force behind the firm economic growth of the eurozone, are set to see slower growth due to the strong euro. At the same time, capital investment is likely to peak and Germany’s ability to drive the European economies forward is likely to decline.
●PIGS set for prolonged stagnation: growth of exports to Germany is expected to slow and the downward pressure on economies due to fiscal austerity is likely to increase.
●UK economy set for continued stagnation: owing to the slow pace of improvement in employment conditions, wage growth is sluggish. Meanwhile, inflation is rising, with the result that real wages continue to fall. Balance sheet adjustment has yet to be completed and the stagnation of consumer spending is likely to be prolonged.

Given these conditions, our forecasts for the US and European economies are as follows:

(i) United States
The growth of exports to developing countries and capital investment centering on the manufacturing sector, will underpin the economy. However, owing to continued income stagnation, among other factors, there is little chance of strong growth in consumer spending. As spending cuts will also exert downward pressure on the economy, the pace of growth is likely to remain slow.

(ii) Europe
Although exports to developing countries will continue to underpin the economies of the eurozone, factors such as the curbing action of the strong euro on exports, fiscal austerity in various eurozone countries and the fall in real purchasing power due to inflation rates remaining high mean that the eurozone economies are likely to slow into the spring of 2012. In the UK, with continuing household balance sheet adjustments, fiscal austerity and rising inflation , the economy is likely see a further deceleration into spring 2012, centering on consumer spending.

The risk inherent in this outlook is that the price of crude oil will rise still further. The fall in real purchasing power and income drain to other countries, among other factors, may exert significant downward pressure on the economic trend.