November 30, 2012

Citigroup sentences to Europe to faster economic death

The closer you read Willem Buiter's imperial uber-blick of the world economy, the more astonishing it becomes.
Citigroup's end of year forecast – Prospects for Economies and Financial Markets in 2013 and Beyond – is in essence a celebration of American revival and ascendancy. It sentences Europe to slow economic death.
The growth gap in 2012 between the US (+2.2) and the eurozone (-0.4) is the 2.6pc, the biggest since 1993.
Professor Buiter – Citi's chief economist – said this is not a one-off. The differential will widen to 3.4pc in 2014 and continue at extreme levels into the latter part of the decade.
The compound effects of this for year after year are dramatic. Europe will be left behind as an outpost of stagnation in a G2 world dominated by the US and China, with a string of emerging powers gaining ground but still far behind.
Euroland's nominal GDP will slip from 78pc of US levels this year to 66pc by 2025. India will overtake Germany by 2020. (German growth will be: 2013 (0.5), 2014 (0.3), 2015 (0.9). 2016 (1.1) — in other words, slow asphyxiation along with the rest of EMU).
Table: Figure 26.

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On US decoupling:
"We expect very different recovery paths, reflecting differing policy choices in managing the deleveraging process, plus underlying differences in terms of the supply-side and energy availability. US real GDP per head probably will rise about 9-10% above the 2007 level by 2017 – clearly outperforming Japan’s "lost decade" (real GDP per head rose by 5% from 1992-02).
"By contrast, in the euro area, we expect continued recession in 2013 and 2014 and prolonged weakness thereafter — with ongoing financial strains and, over the next few years, Grexit (Greek exit) plus a series of sovereign debt restructurings. In the euro area and UK, real GDP per head will probably remain 3-4% below the 2007 level even in 2017 — markedly underperforming versus Japan’s "lost decade".
"The European economies still have underlying potential to grow: but we expect that private sector deleveraging, weak banking system, early fiscal austerity and financial strains resulting from flawed EMU structures will continue to cap demand for an extended period."
Italy will slide slowly into the abyss, with further contraction in 2013 (-1.2) and again in 2014 (-1.5), and near zero growth from then on. Spain is not much better. Portugal will contract 4.6pc next year. They will all need debt restructuring. France is dead until 2016.
So there you have it, the "flawed EMU structures" have doomed Europe to a generation of depression. The euro itself has become a force of economic destruction.
Worse than Japan. This is even more dire than most Euro-sceptics expected. We thought EMU was an insidious undertaking – a Trojan Horse for an assault on the democratic nation state and that would eventually eviscerate the fiscal powers of parliaments – but few thought it would lead to economic depression and mass unemployment as well.
As readers know, I have long argued that the US was less damaged by the 2008-2009 crisis than seemed the case at first. The US shale and energy revolution has transformed the geo-strategic picture. Cheap gas creates a huge competitive advantage for US chemicals, plastics, glass and other industries, and will do so for years.
The "great homecoming" of manufacturing jobs – fleeing wage inflation in China – has ended the 20-year phase of globalisation we all know. The US housing bubble has essentially cleared. Property is now cheap. US banks have the lowest leverage since the early 1980s.
Yes, US public debt is a big problem at near 110pc of GDP, but private debt has been falling fast. It is the two together that matters. (The US private sector has moved from a deficit of 3.8pc of GDP in 2006 to a surplus of 6.1pc of GDP today).
Europe's debt is more intractable because the contradictory effects of austerity overkill are spilling over onto private balance sheets. Brussels obsesses over public debt only. That is crass. It has badly misjudged – if it ever understood – the toxic displacement effect.
Citigroup thinks China will slow to a 7pc growth rate (with a short-term rebound in 2013), and then to around 5.5pc by the end of the decade. The slowdown has huge implications, since the Chinese accounted for 45pc of all global growth from 2008 to 2012.
China is shifting to a phase that needs a lot less iron ore and metals, and perhaps less oil than people assume as well, so you can forget about a return to the frenetic resources boom of the last decade (Citi's view, not mine – since I still think an energy crunch is a big risk). "It is now clear that the commodity super-cycle is over."
Citigroup said China's nominal GDP will overtake the US by 2025 but not by nearly as much as thought earlier. The per capita gulf will remain vast, and per capita is power.
The BRICS/Emerging Market boom will roll on, but more subdued than before, hitting the inflation speed-limit. Brazil will overtake the UK and France next year, but growth is not that special – mostly around 3.7pc to 2017. Ditto for Russia. They will not really close the gap at all with the US.
That is the Citi house view. A cynic might say that a US bank would say such things, though Mr Buiter is Dutch and an ardent pro-European. I don't agree with it all, especially their claim that Russia will rank fourth in a decade (why so if the commodity cycle is over? makes no sense).
Here is their rankings chart:
fig 24.

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Still, in broad-brush terms it is what I think as well. Worth chewing over.