BREAKDOWN DEAD AHEAD?
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lthough a disastrous domestic employment report at the end of May seemed to suggest that the US recovery was facing severe headwinds, the Federal Reserve’s ‘beige book’ economic survey for the AprilMay period concluded that economic momentum was actually picking up. Yet, less than three weeks later, the Fed cut its 2012 growth forecasts to 2.4% from 2.9%. At the beginning of July, the International Monetary Fund followed suit, trimming its US growth forecasts to 2.0% (from 2.1%) for 2012 and to 2.25% (from 2.4%) for 2013. Subsequent data, such as a drop in consumer spending that contributed to three consecutive months of declining retail sales, resulting in prospective annualised second-quarter GDP growth of only 1.5% (after 2.0% in the first quarter), appear to have validated these downward revisions.
By Jesper Hertz
FORMIDABLE CHALLENGES LOOM The momentum of the US economy has clearly deteriorated rapidly and much faster than most analysts had anticipated. Aside from this however, a number of forthcoming events will cause additional concerns as the year progresses. To begin with, the Presidential election in November suggests that politicians will focus more or less exclusively on the upcoming campaign, implying something of a government policy paralysis in the meantime. Post-election, the US will approach a year-end ‘fiscal cliff’ that represents a dilemma for policymakers; if the $4 trillion package of tax increases and spending cuts due to come into force at the beginning of 2013 goes ahead, it risks taking the economy back into recession, but if the scope of the package is modified to be less stringent, it will increase the size of the deficit and possibly lead to a eurozone-style financial crisis. The other major risk, that of the US debt ceiling of $16.4 trillion being reached, has thankfully been averted (a delay in resolving this issue last year cost the US its AAA rating). However, given that this
is an election year, a workable political compromise ahead of the event for the fiscal cliff seems unlikely as yet. These concerns are not shared by everyone, however. Some analysts argue that the weakness reflected in recent statistical reports masks a stronger underlying momentum in the US economy, and point to seasonal factors that they regard as having at least partly overstated the apparent slowdown. Once these factors have been adjusted, they argue, the pace of any further deterioration should be mitigated somewhat (recent labour market statistics suggest that this may indeed be the case). Nevertheless, even if the situation is not as dire as the headline numbers suggest and subsequent data releases give greater cause for optimism, US investors are
still likely to face a ‘wall of worry’ as the aforementioned
deadlines approach. nordeaprivatebanking.com
Jesper Hertz Chief Representative of Nordea Bank in Spain 07.08.2012
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