Fiscal 2011-12 Outlook for the US and European Economies
— The growing risk of a downturn —

　The risk of a downturn US and European economies is increasing as the European debt problem deepens.
　The eurozone countries have agreed on a “comprehensive strategy” to resolve the debt problem, it remains to be seen whether this will be effective. The straitened circumstances of public finance in European countries is also exerting downward pressure on economies and, if anything is creating a vicious circle, amplifying fears over the feasibility of fiscal reconstruction. Large-scale purchasing of government bonds by the ECB is essential if a financial crisis is to be avoided. In the US, too, boosting the economy through policy measures has become difficult.
　In the US, President Obama has announced large-scale economic stimulus measures, but with the political rift in Congress deepening, it is unclear whether these will be enacted. With the fiscal deficit and outstanding debt both clearly worsening, efforts will have to be made to reduce the fiscal deficit. Financial policy measures are also insufficient to boost the real economy and provide a fundamental solution to the European debt problem.
　Under these circumstances, the key points for the future of the US and European economies are as follows.

(i) The US
Balance sheet adjustments: Clearing excessive debt in the household sector is likely to take some time yet, and there is little prospect of a strong recovery in consumption and housing purchasing and leasing. The housing market is likely to seen continued strong downward pressure on prices. Structural problems in employment: Skills and qualifications mismatches and declining skills due to long-term unemployment are obstructing a recovery in employment. Employment growth is likely to remain slow in the future.
Economic pulling power of exports to newly developing countries: Supported by growth of demand from newly developing countries and US companies aggressively moving into overseas markets, exports are likely to continue to grow. Against a backdrop of sales growth in the overseas sector, centering on newly developing countries, among other factors, it is likely that business performance and capital investment will remain firm.

(ii) Europe
Eurozone consumer spending: The deterioration of employment and income conditions, and the fall in housing prices due to the fall in mortgage lending are exerting downward pressure on consumer confidence. The stagnation of consumer spending within Europe will be prolonged. Eurozone exports: The depreciation of the euro is underpinning exports. However, there is a risk that the withdrawal of funds by eurozone financial institutions will lead to a slowdown in the economies of newly developing countries, centering on central and eastern Europe, and that exports to those newly developing countries will slump.
The UK: The direct impact of the debt problem on UK financial institutions has been limited. However, exports to EU countries are expected to decline and domestic demand will stagnate as household balance sheet adjustments continue.

　Given these circumstances, the outlook for the US and European economies is as follows.

(i) The US
Growth of exports to newly developing countries and the underlying strength of business performance and capital investment will underpin the economy. However, economic growth will be hindered by the stagnation of confidence due to efforts to clear excessive debt in the household sector, the continued stagnation of housing prices, the slow recovery in employment and income conditions and the European debt problem, and is likely to remain at a gentle pace of around 2%.

(ii) Europe
In the eurozone, the economic pulling power of exports to newly developing countries has declined. Against a backdrop of fiscal austerity, deteriorating employment and income conditions, and stagnating business and consumer confidence, demand from within Europe is also stagnating and in late 2011 and early 2012, economic growth is expected to turn negative. Thereafter, the beginnings of a recovery are expected, largely on the strength of export growth due to a weaker euro, but as there is little prospect of growth in domestic demand, the pace of the recovery is likely to be slow.

　The risks in this outlook are (i) that the financial crisis triggered by the European debt problem will spread to the global economy and (ii) that excessive financial austerity will cause a slowdown in the economies of the newly developing countries.