The eurozone situation is becoming more serious, according to a SEB Nordic Outlook. The report suggests that conflicting interests and deficient problem awareness has blocked crisis management efforts and created political dithering. The world economy, it states, will be close to recession in 2012 and growth will be lacklustre in 2013 as well.
The gross domestic product (GDP) of the 34 industrialised Organisation for Economic Co-operation and Development (OECD) countries will grow by 1.2% in 2012 and 1.8% in 2013. The risk of worse performance is greater than the probability of stronger GDP growth, mainly due to the eurozone crisis and worsened credit conditions. The eurozone will show negative growth in 2012 (-0.4%). The US economy will grow more strongly.
One bright spot in the economic gloom will be China, with growth of about 8%, but because of problems in the construction sector, risks have increased in that country as well. The journey from imbalance to balance and greater normality will take several years, will be troublesome and will squeeze living standards in the West.
Right now the world economy needs more stimuli. Slower growth will make the task of achieving the established fiscal tightening targets more difficult and will increase the political risk premium. But SEB does not anticipate further austerity measures; the risks are too large and may create a downward economic spiral, leading to further decline in growth and social unrest. SEB expects the impact of fiscal austerity in the OECD countries to be more than 1% of GDP in both 2012 and 2013.
Although there is very limited room for stimulus, measures to combat high unemployment will enjoy high priority. Central banks are under increasing political pressure to continue their ultra-loose monetary policies. The European Central Bank (ECB) will use its limited manoeuvring room to lower the key interest rate to 1% and let its securities portfolio expand by another €500bn during 2012. This monetary policy is possible because underlying global inflation is falling.
Meanwhile restructuring and new regulations for the banking sector mean that there will be a greater risk of credit contraction than expansion. The determination and resilience of political systems to implement necessary but unpopular belt-tightening policies will be emphatically tested in 2012. There is a great risk of continued political uncertainty and turmoil on both the national and international level.
The euro project has a steep slope to climb in terms of credibility due to major structural problems in some eurozone economies, weaknesses in the financial system, unfinished eurozone institutions and increased political risks. The future of the euro is uncertain, and this will hamper growth and force businesses and financial institutions to prepare for the unthinkable: that the euro in its current shape may disappear.
This autumn’s crisis solutions have failed to gain credibility among international investors, including central banks and large sovereign investment funds. By increasing its purchases of sovereign bonds, the ECB will solve the short-term liquidity problems of countries and give political leaders time to solve the main problems – solvency, competitiveness and eurozone institutions – but meanwhile also decrease political pressure for change. Germany’s Chancellor, Angela Merkel, has more clearly begun to chart a path towards European political union, which will be a necessary development in order to ensure the cohesiveness of the euro project, but the citizens of the EU must be persuaded of its advantages.
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