European recession over; see EM inflows in time: StanChart

A day after the European Purchasing Managers' Index (PMI) numbers came in better that the previous months, Sarah Hewin, senior economist, Standard Chartered says the days of European recession are almost over.

"We have seen some pick up in export competitiveness from European exporters and of course confidence is recovering after the really serious crisis that seen in the last few years. All of these together ought to drive the economy forward in the second half of the year," adds Hewin in an interview to CNBC-TV18.
Additionally, Hewin says that emerging markets (EMs) are likely to see inflows once the market gets used to the fact that US interest rates are going to stay low. She adds that the quantitative easing (QE3) will begin by September. Below is the edited transcript of Hewin's interview to CNBC-TV18. Q: What did you make of the improved Purchasing Managers' Index (PMI) numbers? Does it look like we are going to see some improvement in European growth numbers?
A: Yes, these numbers were very encouraging and they really conserve a trend that we have seen over the past few months where activity in the euro area has been improving. In our view they point to the economy moving out of recession in the second quarter. They have had six successive quarters of declining Gross Domestic Product (GDP) from the fourth quarter of 2011 and it looks as if the April to June quarter finally saw some positive growth. Q: So, it would be the end of recession you think?
A: I think so, yes. There are some encouraging signs that the second half of the year will also be looking better. There are a number of factors behind this. Governments are still reducing deficits, but not at such a pace as last year. The credit squeeze is easing marginally. Borrowing costs are coming down for countries even in the periphery. We have seen some pick up in export competitiveness from European exporters and of course confidence is recovering after the really serious crisis that we have seen in the last few years. All of these together ought to drive the economy forward in the second half of the year. So, we are cautiously optimistic. Q: What does that mean for emerging market (EM) and developed market (DM) performance? The general consensus was that maybe in second half you may see a bit of a reversal. It does not look like that. The DMs are still outperforming and EMs are still underperforming. Do you see that trend continuing if Europe too sees signs of recovery going forward?
A: Signs of recovery are going to be positive for EMs. If you have western countries, the US and Europe picking up steam, then that will help exporters from emerging economies. Part of the issue for investors is what to do in an environment where the Fed is starting to reduce its Quantitative Easing (QE).
We expect that that is going to happen from September and so we are seeing rates rising. The nervousness over tapering does seem to have had a larger impact on EM investments than in DMs. Overall, I think this is a sort of transition period. Once market has got used to the fact that actually US interest rates are going to stay low for a very long time even though QE is reducing, then hopefully we will return to a more stable situation and we will see funds moving back into EMs. Q: What are you expecting from the US later today in terms of jobs? Do you think there will be further disturbances in the market if the numbers are good and the market adjusts to perhaps the tapering starting September?
A: That is a very good question. We want to see strong payrolls in the US that suggest the economy is really gathering steam, but a strong payrolls number will much embed expectations of tapering beginning in September. We are looking for payrolls to rise by 190,000, that is broadly in-line with consensus and we are looking for the unemployment rate to fall to 7.5 percent. Overall that will keep the six month average rate of payrolls increases over 200,000. For Fed that is possibly enough to announce the beginning of tapering from September. Of course bear in mind we do have a couple more reports before that September Federal Open Market Committee (FOMC) meeting.