EU not out of woods yet; see global GDP at 2.5%: StanChart

The surprise agreement by EU leaders at the EU Summit to aid the region's struggling banks lead to a global rally last week. However, Fauzi Ichsan, senior economist, Indonesia, Standard Chartered told CNBC-TV18 that despite this step one cannot say that the Europe is out of woods. 

"Now as far as the cash market and capital market is concerned, this step gives us some time, but in the long run there must be structural reforms as far as Europe is concerned especially Southern Europe," he elaborated. According to Ichsan, the impact of the euro crisis on Asia will be relatively limited especially for China, India and Indonesia as they are less dependent on international trade. He sees a slowdown in global economy going ahead, but doesn’t see it slipping into 2009 like recessionary mode. He expects global GDP growth to be around 2.5% this year. Below is the edited transcript of Ichsan’s interview with CNBC-TV18. Also watch the accompanying video. Q: What is Standard Chartered Banks reading of the so called steps towards banking union? Are you all seeing it as a receding of the problems in Europe or it is just a comma in a longer spiral downward? A: At least it has given us some time. The financial markets are expecting some kind of actions. Now as far as the cash market and capital market is concerned, it gives us some time, but in the long run there must be structural reforms as far as Europe is concerned especially Southern Europe. Impact of the euro crisis on Asia will be relatively limited especially for those countries like China, India and Indonesia that are less dependent on international trade. Q: That is true but the impact for a country like India for instance and that would be true of other countries I would assume, is the manner in which crude has rallied on the back of this expectation that Europe will not be that badly off, do you see commodities continuing to tick higher that will be of direct bearing both on inflation numbers as well as fiscal deficit numbers for a country like India? A: Fundamentally, the global economy is likely to slowdown, we expect global GDP growth to be around 2.5% this year. As far as the real economy is concerned, demand for commodities is likely to soften this year. If commodity prices rebound, that is likely to be short-term and there is likely to be a market reaction to this temporary relief as far as Europe is concerned. But in the medium run, we still expect commodity prices to remain soft because of the weaknesses of the real economy of the world. Q: We had Dr Greenspan earlier on the channel from our network talking about what he though the eurozone problems were and he described it as, ‘a leaky boat’ indicating that the fundamental problems still exist in the eurozone going forward. What in your opinion is the analysis post the EU summit? Do you think that the fundamental issues in Europe stand a little more resolved as opposed to earlier? A: Obviously Europe is not out of the woods yet. If you look at the bond yields for example it’s very difficult to imagine that governments like Italy and Spain issuing 10 year notes, 6-7% yield, while the GDP growth of the economy is only zero percent. So its not sustainable in the long run. But one has to differentiate between short term market solution and long term structural issues. As far as Asians are concerned, we are witnessing shift in economic powers from the west to the east and during this shift there is likely to be mini crisis and such mini crisis is likely to happen in the west like in US, Greece, Spain, Italy. That’s not changed the fundamental fact that the economy of Asia is on the rise. _PAGEBREAK_ Q: What do you make of the Chinese PMI numbers and therefore how do you see things panning out, is it going to have an impact on commodity prices? A: We don’t expect the global economy to dip into recession like in 2009. In 2009 the global economy growth was negative 0.8% and this year we expect global GDP growth to be 2.5%. Therefore, we can expect the US and Chinese Indian economies to slowdown for example, it is just minus slowdown primarily because the global economy is still likely to grow. That will certainly provide some kind of support as far as domestic consumption and providing floor for commodity prices. Q: How much are you expecting by way of Chinese reaction through maybe reserve ratio cuts or interest rate cuts and what would you pencil in by way of a Chinese GDP growth in this quarter? A: We expect for example a Chinese GDP growth to come down from 9.2% last year to 8.1% this year. We expect that GDP growth to rebound back to 8.7% next year. As far as monetary policy is concerned, given that GDP growth is unlikely to decelerate sharply, monetary relaxation is unlikely to be sharp. Q: You look at the Indonesian markets very closely, just give us a sense in terms of what exactly are you making for the currency space because the rupee as well has seen a strong depreciation along with the Indonesian currency? Give us a sense in terms of which economy would you think is most resilient at this point in time within the Asian space and what your view would be on the Asian currency space? A: Basically, the euro crisis will affect Asian countries to varying degree. Those Asian countries that have large domestic markets such as China, India, Indonesia will have relative insulation. That said, there are two other factors that will determine the impact of the euro crisis. One is the fiscal deficit of the country and second is the current account balance of the country. Countries that have large domestic market, strong fiscal position and strong balance of payments position are likely to be less affected by the euro crisis. Countries that have small domestic market, current account deficit and big fiscal deficit are likely to be more affected by the euro crisis and as a result their currencies are likely to be affected more. For example, the Chinese currency has been affected less compared to the Indian rupee and the Indonesian Rupiah precisely because China has strong balance of payments as well as strong domestic market. Whereas India and Indonesia have fiscal deficits and have current account deficits, which means that its prone to risk off sentiments among the global investors. That has resulted in equity markets weakening and currency weakening as well. Q: What is Stanchart’s internal view on crude prices, whether it is brent or WTI, do you see Brent under USD 100 per barrel for the current quarter, the July-September quarter or if it is WTI that you are tracking, would you see it USD sub-90 per barrel for a better part of the current quarter? A: We do expect crude prices to rebound in second half of this year primarily because we expect the impact of the euro crisis or at least the sentiments on euro crisis to weaken in the second half of this year. We expect the ECB, the IMF and the EU to take the necessary steps and as a result we expect crude prices to exceed USD 100 per barrel by the end of this year.