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Global recovery but Southern Europe in 1930s depression

The recovery in emerging Asia is taking hold and will help global growth rebound in 2013, despite continued recessions in European crisis economies. The US will not jump off the "fiscal cliff" but rather continue contributing to global recovery. Imbalances in the eurozone are far from resolved but will not lead to a financial collapse. Reduced private sector funding of foreign debt in the "PIGS-economies" is being offset by increased lending from the ECB and eurozone governments but it is questionable whether this is sustainable in the longer term.

It seems increasingly clear that China needs to revise its growth strategy. The new Chinese leadership is aware of the challenges ahead and has signalled a readiness to address the issues at hand. While labour shortages and structural deficiencies are likely to limit growth below the average for the recent past, China will likely remain a strong engine in the global economy. We are also positive to other emerging Asian economies. Increasingly, the Asia Pacific is becoming a dominant force in the global marketplace. With the possible exception of Eastern Europe, we feel that emerging economies as a collective are well positioned for growth ahead.

The recovery in the US continues to be weaker than during similar episodes in the past. The dividends from the massively expansionary policies during recent years are modest. Most importantly, job creation has been far more sluggish. We thus feel that the authorities' expansionary financial policies have reached a cul-de-sac. To heal the wounds from the financial crisis and further necessary adjustments in the economy, policymakers have to consider a battery of structural measures. To make such a policy initiative possible, the US needs a broad-based political consensus, which so far seems elusive.

In the eurozone, we still see no permanent solution to the problems in the crisis economies. While the unemployment rate in Germany has hardly come up from its all-time low, the ranks of the unemployed in Southern Europe are swelling fast. We have to go way back in history to find something similar. The situation in Spain looks like a social catastrophe in the making with almost a third of the labour force soon unemployed, like the Great Big Depression in the 1930s. We are sceptical about the prospects for the current crisis management strategy and would not exclude devaluations and exits from the eurozone eventually.

Sweden is no doubt affected by the adverse external environment. The manufacturing sector has faced headwinds for a year now and is pulling down the more domestic parts of the economy. The already soft labour market is expected to weaken further as a result. Looking ahead into 2013, private and public consumption are likely to be the main growth drivers, though forecast GDP growth will remain very slow during most of 2013. This is beyond the control of economic policy, in our view, but as global trade picks up, we expect Swedish growth to recover.

Exchange rates tend to respond to a number of influences in the short term, but over time, real exchange rates tend to mirror relative changes in GDP per capita. Against this background, we expect many Asian currencies to appreciate further in real terms. The JPY is an exception, as the Japanese price level is too high due to yen strength. The same can be said for the eurozone, and in the absence of EUR depreciation there is a risk of a Japanese scenario playing out there, with stagnation and deflationary tendencies.

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