Scenario for 2010-2011: a slowdown is not a meltdown

- "Our scenario rules out the eventuality of a double-dip recession in the US. But while we have always defended the idea of sluggish post-bubble growth, the 3% growth that has been forecast for the US seems over-optimistic. Featuring a downward revision to 2% over the next two years, our new scenario sticks closer to the idea of a sluggish growth rate."
- "It to see how Europe will be able to repeat its fine growth performance achieved in the first half of the year. Against a backdrop of a global slowdown, a soft landing is more likely for the second semester of 2010. We are forecasting annual growth of around 1.5% for the eurozone this year and next."
- "As part of the changed US scenario, we have shifted the timetable for the Fed’s first rate hike to Q1 2012. With growth topping out at 2%, unemployment should prove sticky, which may prompt the Fed to bide its time."
- "The ECB, however, could make its move earlier, as it is in a hurry to normalise liquidity conditions and return to key rates that are more in line with this forecast recovery, however sluggish it may be. We are forecasting a target 1.5% for the minimum bid rate by year-end, with a first move coming in September 2011."
- "There is also talk of normalisation in the bond markets once fears of a new US downturn recede. We are still forecasting a rise in the risk-free rate (from 2.75% for the German Bund and 3.10% for US 10-year paper to respectively 4.0% and 3.80% in December 2011), but the lacklustre recovery and absence of inflation are likely to restrict this upward trend."
- "Once the markets have factored in the idea that the US will see a smooth slowdown, the dollar is likely to regain some of its lost ground. EUR/USD parity should return to its equilibrium level of around 1.22 by end-2010 moving to 1.15 by December 2011."

CreditAgricole Eco News 20100913

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