Handelsbanken: New macro forecast: Beggar thy neighbour

Our main scenario remains a global turnaround led by emerging economies. Data over the summer indicate that additional stimulus measures in emerging economies are needed before we can be more certain that a global expansion will take hold. This is especially true given that a new round of tightening among eurozone governments has them jumping off the fiscal cliff again, though the US is not likely to willingly follow suit. While the US still needs a boost from exports, there are some bright spots on the home front, as housing finally seems to have turned the corner.

The risk of financial collapse in the eurozone is being kept in check by the ECB. However, the conditions for further bond purchases by the ECB are that governments will have to seek support from the ESM first and accept external monitoring. With the new fiscal pact from this spring, budget cuts will have to be larger than previously expected, depressing eurozone growth further in 2013-14. Germany has held up well so far despite weakness in the eurozone, but it is now in need of a stronger boost from emerging markets.

The eurozone, in particular the crisis-ridden south, needs a big boost to competitiveness to avoid even steeper downturns. Will Spain follow Ireland's path of an improved real economy or become the next Greece? The ECB cannot influence competitiveness issues other than through the impact on the euro exchange rate. More monetary easing from the ECB relative to the Fed should help weaken EUR/USD to parity over time. Our view on the US economy is more positive; eventually the Fed should have reason to tighten relative to the ECB.

The recovery in the US has never really taken off. Growth has been sluggish and several million workers are out of jobs after the recession. Most of the jobs have been lost in the manufacturing sector, as low-skilled production has moved to China. Economic policy and automatic stabilisers are not working; we predict that growth will remain slow and erratic. The Fed will likely ease policy further at its next meeting and continue with its exceptionally loose monetary policy until at least late 2014.

A more pronounced slowdown in China than expected this summer makes us trim our growth forecast for 2012. However, we expect stimulatory policies to raise growth and inflation this autumn. Overcoming structural impediments is required to maintain growth at around 8 percent over the medium term. We expect no major exchange rate moves against the USD.

Given the recent strength of output and employment in Sweden, short-term labour market prospects are better than earlier assessed. But we expect the growth slowdown to continue. A longer period of "stall speed" growth implies persistent high unemployment. By the end of next year, the impact from monetary and fiscal policy easing should have boosted demand. Fundamentals point to sustained SEK strength, although not necessarily as strong as recently. This will challenge exporters, but long-term Swedish exports at large will cope.

Jan Häggström, Chief Economist
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