Bangkok--29 May--Standard & Poor's
Despite mounting evidence that the first quarter of 2009 may prove to be the low point of the current economic slowdown in Europe, it would be unwise to expect anything like a strong upturn says a report titled "European Economic Outlook: The Long, Slow Climb From Recession Begins," published yesterday by Standard & Poor's.
"These early signs of recovery should be treated with caution," said Jean-Michel Six, Standard & Poor's chief economist for Europe. "In our opinion, they suggest that the destocking phase in the corporate sector is approaching an end, allowing production and demand to be better aligned in the coming quarters. That, and a slight improvement in orders from emerging markets, would set the stage for a return to modestly positive GDP growth later this year."
"We anticipate that growth in the next few quarters will edge upward, but will likely be followed by an extended period of well-below-trend growth through the end of 2010. This is because the forces acting against consumer spending remain substantial, namely the increasing pace of job shedding, continuing losses in household wealth, and the stabilization in consumer price inflation now that commodity prices have stabilized."
Balancing these negatives is the increasing level of monetary and fiscal policy support. As the report points out, central banks have been particularly active in their efforts to address the current crisis from its start in August 2007. Their fire-fighting has become even more spectacular since the collapse of Lehman Brothers in September of last year. This is because the resulting freeze-up in the financial markets made it even more necessary for central banks to act as lenders of first resort, as illustrated by the massive increase in their balance sheets. Last September, the U.S. Federal Reserve's total balance sheet was approximately $900 billion, or 6% of U.S. GDP. At the end of December, it had mushroomed to $2,300 billion (16% of GDP) on the back of a massive increase in lending to the financial sector. Over the same period, the European Central Bank's balance sheet rose to 23% of (Eurozone) GDP from 15% of GDP. In the first quarter of 2009, however, the Federal Reserve's total assets declined to 15% of GDP and those of the ECB to 20%. This decline could be an early sign that demand for short-term liquidities from the financial sectors in the U.S. and Europe is no longer as strong because interbank lending is resuming.
The release of actual first-quarter GDP numbers for 2009 lead us to trim back, for the second month running, our annual average forecasts for GDP growth for this year and, in some instances, 2010. We have slightly cut our Eurozone GDP estimate for this year to negative 4.2% (from negative 4.0% in April). Similarly, we now anticipate that German GDP will decline by 5.0% this year (from negative 4.5% last month) and bounce back to 0.6% next year (unchanged). We estimate that French GDP will decline 2.9% this year (2.5%) and bounce back to 0.5% next year (0.8%). Finally, our forecast for Ireland is scaled back to negative 7.7% this year (6.5%) and negative 1.5% next year (unchanged).
The report is available to RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected]. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; select Ratings in the left navigation bar, then Find a Rating. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.
Media Contact:
Mimi Barker, New York (1) 212-438-5054, [email protected]
Analyst Contacts:
Jean-Michel Six, Paris (33)-1-44-20-67-05