In an interview to CNBC-TV18, Arnab Das, managing director-research, Roubini Global Economics (RGE) gives his expectations for the global markets. He says that despite the Euro zone stabilising, it will be hit by a recession in the next year.
"The Euro zone will be in a recession next year, the periphery will continue to be in a depression. Greece will be entering the sixth year of significant economic contraction. Spain will continue to contract, Italy will continue to contract," he says.
Adding on how the recession will affect the other countries in the Euro zone, he adds, "Even the core of the euro zone countries that have been previously economically healthy- France and Germany and others will also be affected and infected by what is happening in the periphery and several of them will be in a recession bringing the whole Euro zone into recession."
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Below is the edtited transcript of Das’ interview to CNBC-TV18.
Q: It was expected to be a disastrous year For Europe and it ended 30 percent higher on the DAX year-to-date (YTD), 16 percent higher on the CAC, 9 percent higher in Italy, 7 percent higher on the FTSE in the UK, ofcourse the IBEX though looked like it will close the year negative. Is there a super Mario and his outright monetary transaction (OMT) to thank for this?
A: What is quite remarkable is that the market has bought his words without him having to spend a red cent so far, in putting his money where his mouth is. So, he has achieved something quite remarkable that even the United States was unable to do during the crisis in 2007-2008, that is loading up a bazooka without firing it.
Now, we are in this kind of a holding pattern where there has been a sharp recovery in Spain and some of the other peripheral markets in the euro zone. There has also been recovery in risky assets around the world including emerging markets (EMs) especially India.
That adds on to the stabilisation in the Euro zone and it is being continued. So, our outlook is that the short-term risk of a financial disaster or a significant economic downturn in the world led by double dip, the recession risk in the US coming from the fiscal cliff, these sorts of tail-risks have been substantially mitigated. That is very good news and that is worth quite a lot in terms of risk premium and risk premium is adjusted around the world accordingly.
However, the underlying economic challenges still remain. The Euro zone will be in a recession next year, the periphery will continue to be in a depression. Greece will be entering the sixth year of significant economic contraction. Spain will continue to contract, Italy will continue to contract, even the core of the Euro zone countries that have been previously economically healthy- France and Germany and others will also be affected and infected by what is happening in the periphery and several of them will be in a recession bringing the whole Euro zone into recession.
The US growth process is already anemic at best around 2 percent. So, the growth rate which might have been in the mid-twos without the fiscal adjustment or maybe in the mid-ones is still not comparable to Euro zone and Japan among high income regions of the world. However, it is still very bad compared to a trend in potential growth in United States even if you accept that there is a new normal with a much lower trend growth rate. It is not 1.5. It’s fully in high-twos rather than the mid-ones. For the 1.5, it is close to or at this idea of a stalled speed in the US where the growth rate is very vulnerable to any further shocks and the economy might start to spiral down into a mild recession if something else goes wrong in the world. That could be another shock for Europe or a geopolitical shock from escalation of tensions after elections and sharp rise in the price of oil because of events or words with Iran. So, we are far from out of the woods both in the Euro zone and in United States.
Emerging markets, although the cyclical outlook has improved significantly with some bounce in reform expectations in India, there is a sort of bounce in growth prospects with an easing of brake paddles in China, but the reality is that all the major emerging market countries in the world are slowing down to a lower trend rate of growth than people have been hoping for. China will be in the mid single digits by 2014 or even low single digits. India will still probably be in the high single digits but it won’t be close to 10, it will be closer to 5 than to 10. So, there is good news but there are also concerns on risks and some bad news to factor in as well.