Video transcription: 2012 Economic Outlook

Experts' views - Patrick Artus, Chief Economist - Natixis


2012 Economic Outlook

[Patrick Artus]

contrary to popular belief, and I’ll explain the reasons for this belief, we feel that 2012 is already and will be a better year than 2011. So why isn’t it the message that is conveyed by the media? Well, because the media, or the IMF, or the World Bank; all observe the average annual growth rate. But as you well know, if the rate is low at the end of 2011, the 2012 average rate is lower as you begin the year with lower activity levels. Therefore, in 2012, the average annual growth rate worldwide will be lower than in 2011. We are now on an upward trend compared to 2011, which was on a downward trend until the middle of the year or the end of the fall of 2011 depending on the country. The world activity hit a cyclical low around September, October of 2011 and since then, it has been slowly moving upward. We cannot call it a growth curve yet but there is an improvement.


What exactly is causing this improvement?

[Patrick Artus]

The United States are beginning to feel the effects of the widely expansionary monetary policy that was applied. It was hard. You know that a lot of money was injected by the Fed and by the Central Bank into the US economy. For a while there was a doubt that it would have any effect, because the effect did not come from the usual channel. Usually, when a central bank applies an expansionary policy, it loans liquidity to banks and banks in turn loan this liquidity and loan more. That’s what we teach our students in economic science, i.e. to boost credit to stimulate the economy. But there was no credit boost, either in the United States, in Europe, in Japan, or in the United Kingdom. What stimulated the economy is a more original mechanism: actually, American households also received liquidities. They sold bonds, which were bought by the Central Bank which paid by creating money. Because the return on this money is practically 0% in the US, they decided that it was better to spend that money.

And the return to consumption in the US is stimulating the economy as a whole: residential real estate is starting again, the number of building permits will grow; company investment is also back, the employment market is improving, we’ve already gained 1 point and a half on the unemployment rate, the American economy is creating 150,000 jobs every month, exports are not bad because industry is picking up and has started to invest again and improved its competitive edge. Once again, we can’t really talk of an economic boom, but the United States will experience reasonable growth in 2012. We can’t say if it will be 2%, or a little more or even 2.5%, but it will probably be more than 2% growth. In any event, it will be higher that last year’s with a low at the end of spring last year. As for emerging countries, the mechanism is much more traditional. Central banks decided to stop interest rates from increasing and to tighten credit and now they’re starting to do the opposite. At the end of last year, we reached the end of a tight monetary policy cycle in emerging countries. Since then, the monetary policy has become more expansionary in China, Brazil, Korea, Thailand, the list is long… and in those countries, it’s the traditional model that works best: when you lower interest rates, more people get into debt. Because more people get into debt, there is more consumption, more housing, more stock, and that’s what shows. Once again, it is not very strong, but what is increasingly clear in emerging countries, specifically China, is a strong construction activity, more consumption, more stock and credit and money creation.

In the euro zone, it’s a bit more complicated. There is no real improvement of growth: on the contrary, we are quite pessimistic regarding growth for a number of countries that are quickly reducing their public deficit, i.e. Greece and Portugal, but also Spain, Italy and, in some degree, France. We can always fight for a sixth of a growth point, but French growth will probably be just above 0 this year. Nevertheless, the public debt crisis is receding. The interest rates paid by Italy, Spain, Belgium etc. and even France are lower, mainly because financial markets have finally accepted that there won’t be a break in the euro. That scenario is not credible. Second, the ECB and Mario Draghi heavily loaned money to banks and part of these 1-percent-interest loans has been loaned in turn to countries. This is particularly true in countries such as Italy or Spain, where the lower interest rates on government loans are due to the fact that banks have started to buy public debt because they can very easily be financed by the ECB at low rates. The ECB is often criticized because it refuses to acquire public debts directly above a small amount. If it creates money to finance banks which buy public debts, there is not much difference economically. So, in reality, the ECB is behind the improvement of the euro zone crisis.

Cooperation between governments is better with fewer dissensions. Germany is more cooperative. We feel that everyone wants to pull through, which wasn’t really true six months ago. People no longer think that Germany wants the euro zone to break up. Angela Merkel says the opposite every day, that the ultimate goal is a political union, obviously with much difficulty and work to get there, but without the difference of opinion experienced six months ago. Despite those divergences of opinion, I feel that in the long term we will create this political union. Even Germany today believes it, which obviously changes the perception of Anglo-Saxons on the future of the euro.

So basically, things are a bit better. Obviously, the economy of the euro zone will suffer because 2012 is the year when all countries, with no exceptions, are reducing their public deficit, i.e. France, Spain, Italy, Greece, Portugal, the UK also, it’s a big commercial partner, Germany, Belgium, Austria, everyone is reducing their public deficit. In terms of GDP, 2012 will not be a good year. But we are out of the most violent part of the crisis as we are implementing a more cooperative approach and helping countries get financing at more or less reasonable interest rates.