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European Economic Outlook Suffolk County Council Azad Zangana Schroders’ European Economist James Montefiore Client Director 25 July 2012 For professional.

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Presentation on theme: "European Economic Outlook Suffolk County Council Azad Zangana Schroders’ European Economist James Montefiore Client Director 25 July 2012 For professional."— Presentation transcript:

1 European Economic Outlook Suffolk County Council Azad Zangana Schroders’ European Economist James Montefiore Client Director 25 July 2012 For professional investors only. This material is not suitable for retail clients The Cost of Austerity

2 1 Key issues European Economic Outlook Growth vs. Austerity, can there be a winner? Where next for the Eurozone? When will the UK recession end?

3 2 Backlash against austerity gains legitimacy Hollande victory lends credibility to growth debate Source: Telegraphy online

4 3 Austerity is clearly affecting growth Divergence in recovery paths within Europe Source: Eurostat, Thomson Datastream. Updated: 12 July 2012

5 4 Eurozone recession likely to be underway Source: Thomson Datastream, Markit, BNB, Schroders. Updated 12 July 2012 Leading indicators vs. Eurozone GDP growth

6 5 More growth comes at a cost, and debt levels are already high Peripheral government bond spreads and debt to GDP levels Source: Thomson Datastream (right); European Commission Spring 2012 Forecast (right). Updated: 22 May Please see the forecast risk warning on the important information slide.

7 6 Greece endgame in sight

8 7 Sovereign debt crisis reaches dangerous stage Greece could exit Eurozone in 2013  Greece finally has a new government that wants to stay in the Eurozone.  However, it also plans to test the Troika’s resolve by trying to postpone and reverse some fiscal and structural reforms.  Given the stress now present in Spain and Italy, we believe the Troika is likely to relax the conditions on Greece, in order to focus on the others.  However, Greece remains deeply uncompetitive, and we think Greece will be forced to abandon the Euro in Source for image: Schroders

9 8 What to expect from a Greek exit? Greece could exit Eurozone this year  Exit would happen during a weekend/out of business hours.  Capital controls would instantly be applied including border checks.  All deposits would be switched into the new Drachma, and the Bank of Greece would start to replace. physical currency as soon as possible  The Drachma is expected to depreciate by 30-70%, causing high inflation in the first few years, along with a very deep recession.  However, local tourism and some export industries will begin to boom, which should lead to the start of the recovery. Source for image: Reuters

10 9 Banks must hold on to the confidence of investors Source: Thomson Datastream, Schroders. Updated 10 July 2012 Premium for cost of borrowing for banks vs. non-banks

11 10 However, ECB itself will be a big loser from a Greek exit TARGET 2.0 central banks’ claims at ECB Source: Thomson Datastream, Schroders. Updated 18 July 2012

12 11 Greek and Spanish deposits flying out of the door Source: Thomson Datastream, Bank of Spain, Bank of Greece. Updated 10 July 2012 Household and non-bank corporate deposits in banks

13 12 Who will suffer if the Eurozone goes into recession? Source: IMF Direction of Trade (DOT) database. Average between Updated 22 May 2012 Eurozone exports by partners

14 13 Example: UK exports to peripheral Europe underperforming Export values levels by partner (Jan’10=100) Source: ONS, Schroders. Updated 12 July 2012.

15 14 Expect another bad Q2 Diamond Jubilee holiday will cause loss of output Source: ONS, Market, Schroders. Updated 06/03/2012.

16 15 Austerity UK will keep growth subdued for most of this decade Public sector net borrowing & change in cyclically adjusted budget deficit Source: OBR, HMT, Schroders. Updated 23/03/2012. Fiscal tightening delayed

17 16 Risks to inflation outlook are on the upside at the 2-year horizon Schroders inflation forecast Source: ONS, Schroders. Updated 18 July 2012.

18 17 Fundamental step-change in pricing pressures from goods UK goods vs. services inflation Source: ONS, Schroders. Updated 18/07/2012.

19 18 Interest rates flat as a pancake Schroders interest rate forecast Source: Schroders, June 2012 forecast Please see the forecast risk warning on the important information slide

20 19 For professional advisers only. This material is not suitable for retail clients. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Source: Citywire ‘More ratings than anyone else’, as at 30 November Issued in July 2012 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registered No: England. Authorised and regulated by the Financial Services Authority. UK Important information

21 20 Appendix

22 21 Shape of things to come Baseline GDP forecast Source: Schroders June 2012 forecast.

23 22 Shape of things to come Baseline UK GDP forecast Source: ONS, Schroder. Updated 12/07/2012.

24 23 Commodity prices set to help lower inflation in 2012 Annual commodity price inflation and implied rates by forwards Source: Thomson Datastream, Bloomberg, Schroders. Updated 22 May 2012

25 24 Leading indicators suggest weaker near term growth GDP growth vs. Schroders Activity Index Source: ONS, Markit, Schroders. Updated 12 July 2012.

26 James Montefiore – UK Institutional Client Director Biographies Joined Schroders in 2000 as UK Institutional Client Director, based in London Responsible for client servicing to UK pension funds and their consultants Previously worked at Threadneedle and Scottish Widows in a similar role. Prior to that he worked as a private client investment manager/analyst for private bankers, Adam & Company in Edinburgh from Began his career in financial services with private client stockbroker Williams de Broe from 1987 Prior to the financial industry he served for 8 years as an officer in the Royal Marines from An Associate of the UK Society of Investment Professionals (UKSIP), previously known as AIIMR. Member of the CFA Institute. A Fellow of the Chartered Institute of Securities & Investment 25 Azad Zangana – European Economist Responsible for formulating the house view on the UK and Eurozone economies. He is based in the Schroders’ Economics Group in London. Investment career commenced when he joined Schroders in Prior to joining Schroders he was an Economist at HM Treasury working on UK Macroeconomic Analysis and Eastern Europe. Azad is a regular contributor to the press including television and radio appearances. He holds an MSc in Economics, University of Southampton and BSc in Economics, Royal Holloway, University of London. He also holds the Investment Management Certificate (IMC).

27 26 For professional advisers only. This material is not suitable for retail clients. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Source: Citywire ‘More ratings than anyone else’, as at 30 November Issued in July 2012 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registered No: England. Authorised and regulated by the Financial Services Authority. UK Important information


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