Europe avoids the bad omens of the United States and China

Europe avoids the bad omens of the United States and China

2023-05-30 21:12:55

BarcelonaEurope is doing well enough, or at least better than the rest of the world. This is clear from the two presentations on the global economic situation on Tuesday at the Cercle d’Economy, which pointed above all to an imminent reduction in inflation that will prevent the European economy from entering recession, while both China as the United States arouses more doubts among experts.

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The first presentation was given by Mário Centeno, current governor of the Bank of Portugal – and by extension member of the governing council of the European Central Bank -, a veteran of European economic policy, as he was also Minister of Finance of his country and president of the Eurogroup. Centeno has been clear about the economic outlook in Europe: the main danger was inflation and it is falling. There are “a very high number of signs” pointing to a brake on price increases, especially the drop in the price of oil, which “has been falling for a long time,” added Robin Brooks, an economist at the think tank American Institute of International Finance.

If these data give rise to optimism, in the case of the euro zone it is added how the storm of the covid crisis was weathered. According to Centeno, with the pandemic there was “the risk of doing again today” what was done in 2008 and 2011, that is, of giving a response to the crisis that did not equally favor all member states and that entailed a “risk of fragmentation” of the euro zone.

According to Centeno, the reasons why this did not happen is because 14 of the 20 countries in the euro zone “had balanced finances” and “the banks were more capitalized” compared to the financial and debt crisis. This good situation “allowed a qualitative leap in European economic integration”, he opined, with the approval of the Next Generation investment plan and, above all, the issuance of European bonds by the European Commission.

Although recently the German economy – the continent’s engine – has technically entered recession, the ECB rules out a crisis in the euro zone as a whole: the scenario envisaged by the institution is one of “low growth but not recession” and it hopes that the countries that do suffer a contraction in activity do so for a short time.

Risks in the US

With the aim of cutting price rises, in just nine months the ECB has raised interest rates from 0% to 3.75%, although the latest increase already slowed the rate of increases, following the of the Federal Reserve in the USA. But there is a risk that central banks will overreact and raise rates too far, causing the private sector to stop consuming and investing on a large scale and activity to contract, a so-called overshooting. “Fortunately, the economy has reacted well and we are growing, albeit more slowly. You don’t see today that there is a overshooting“, commented Centeno.

This is not the case with the US economy. The world’s first economy emerged from the covid crisis much faster than Europe, thanks mainly to fiscal and monetary stimulus approved by Congress and the Fed, respectively, which translated into an increase in the cost of living. While in the EU inflation was mainly due to problems arising from bottlenecks in the industrial chains and the increase in the price of energy resulting from the war, the consensus among economists is that in the US one of the causes was also an excess of demand. This forced the Federal Reserve to raise rates very quickly, which has left both industrial and household credit “too weak” to cool growth, according to Brooks.

This economist sees several “worrying” indicators in the United States. The first is that the Fed has announced that it is halting rate hikes to avoid a recession. Under normal conditions, he added, the end of the hikes would be marked by a rise in the stock markets, but the S&P500 – the main index of the US stock markets – is “flat”. Likewise, the “big surprise” represented by the bankruptcy – and subsequent rescue – of several banks has increased uncertainty in the country, added Brooks.

A stopped China

If the US presents more risks than Europe, China does not have a better outlook either. The zero covid policy promoted by Beijing and the bursting of a real estate and financial bubble that affected many regions paralyzed much of the industry of the country, considered the factory of the world. “The world was counting on strong Chinese growth in 2023, but the world will have to get used to a less relevant China in growth,” said Alicia García Herrero, chief economist for Asia-Pacific at the investment bank Natixis

In fact, the Chinese slowdown has direct effects on companies’ production costs and, by extension, on inflation. China accounts for 25% of the world’s manufactured exports, but a third of exports of intermediate goods, which are very important to industry and whose prices are falling. “China’s export prices are as important as oil – said García Herrero – and, thank God for us, they are negative.”

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