Spain: near-term risky, medium-term more promising?

- "We see several near-term risks for the Spanish economy. GDP is likely to contract in the third quarter following the VAT hike, while the political environment remains difficult ahead of the 2011 budget vote."

- "We believe that the risks of a double-dip recession have receded, however, and that the economy is more likely to edge towards a protracted period of modest expansion in activity."

- "The main challenges are in the medium term as Spain has to switch to a more competitive growth model at the same time as the private sector succumbs to a drastic deleveraging process."

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."

Consumption restricted by the sharp slowdown in income, as it emerges from the crises

- "French household consumption has slowed sharply since the financial crisis hit. The accompanying recession led to a severe deterioration in the labour market and hence to a slowdown in income from activity and increased uncertainty as a result of a rising unemployment rate."
- "The crisis also led to a sharp fall in asset prices, with stock market indices and interest rates falling, lower house prices, etc., and hence a reduction in the value of household wealth."
- "Since the pick-up in activity which began in early 2009, the labour market has continued to deteriorate, but at the same time, asset prices have risen."
- "In view of this, it is worth asking how household consumption is behaving as France emerges from the crisis. In this article, we look at the factors determining private household consumption in France."
CreditAgricole Eco News 20100721

The double-dip risk and its market implications

- "Market participants face seriously limited visibility on the pace of near-term growth,
particularly for the advanced economies."
- "However, we do not believe that the global economy is about to fall back into a recession."
- "A double-dip – which is not the central scenario we choose – would most likely drive
rates even lower, but bond price upside is fairly limited, particularly at the front end."
- "In the event that the US did become the first to slide back into recession, the USD would be
hard pushed to find any support, at least initially. As the downturn shifts from local to global, it would become clear that there is nowhere to hide from a double-dip scenario. Against this backdrop, the USD would likely regain its status as a safe-haven play."
CreditAgricole Eco News 20100719

Cutting public deficits in France: between ambition and political will

- "On 30 June, the French government presented a preparatory report in the run-up to the forthcoming public finance policy debate."
- "The report sets out the main measures that need to be taken to cut public deficits in 2011-2013 from 8% in 2010 to 3% of GDP in 2013. A full, detailed, three-year budget for 2011-2013 will be presented in the autumn."
- "The reduction of 5 points of GDP in deficit ratios over three years is extremely ambitious. Four of the five percentage point would come from structural measures, and notably a very marked slowdown in public spending of 0.6% per year by volume in 2011-2013 compared with an average increase of 2.2% per year in 1998- 2008. The remaining percentage point would be achieved through the cyclical growth, with forecast volume growth of 2.5% a year."
- "This scenario clearly seems too optimistic. Based on our own forecast of growth returning very gradually to its potential rate, the ratio of deficit to GDP should come out at 4.5% in 2013. Additional measures are thus likely to be necessary to counter these cyclical effects and achieve the announced target."
CreditAgricole Eco News 20100708

Back to the Future

- A new cycle of innovation?: "While the economic crisis undergoes its multiple transformations, two recent announcements—the creation of a "synthetic cell" and a new family of components that opens the way for quantum computers—come as reminders that technology is continuing to progress. Information technology has been the innovation fueling economic growth for the past 50 years. Will nanotechnology be the engine for the next cycle? Nanotechnology is extraordinarily promising, but also raises issues of societal choice that call for citizen participation."
- 50 years into the digital age: "The technologies that created and developed the digital world for the past fifty years are continuing to advance. A new age has dawned, with the capacity for over 4 billion people to use powerful information and communication tools delivering ever more numerous and innovative services."
- Future screens: You haven't seen anything yet!: "The year is 2018 and the sun is shining on the beach. Comfortably resting on a lounge chair, you switch on your
lightweight eReader (with photovoltaic cells embedded behind the screen) and view a video of Eclairages 189, the bimonthly economic publication of Crédit Agricole. A notification window opens, reminding you of a lunch reservation. A smile crosses your face as you roll up the flexible screen for storage. Eight years before, in the same place, after succumbing to the hype you were sitting with a brand new iPad. Alas, issue 142 that you had so much trouble downloading via WiFi at the local café turned out to be unreadable with the bright light and reflections, while the combined effects of your child's water pistol and the gritty beach sand finally changed your beautiful pad into a useless brick."
- ICT and agricultural development in the South: "Several innovative initiatives are exploring the potential of information and communication technology (ICT) for agricultural development in the emerging Southern economies. While no one doubts the utility of ICT under the conditions of scarcity that characterize rural areas in developing countries (DCs), their use raises significant sociocultural issues."
- The promising future of lithium-air batteries: "Lithium-ion batteries are now part of daily life; their benefits include large storage capacity, lack of memory effect, and a low self-discharge rate. But many future applications, e.g. in transportation, require the development of batteries with greater capacity. And lithium-air battery could be a solution."
- The new shapes of carbon: Fullerenes, nanotubes and graphenes: "Since the 1980s, researchers have discovered and identified new structures entirely made of carbon, which turn out to have exceptional properties for a broad range of potential applications. But while nanotubes are moving into a preindustrial phase, graphene is still a laboratory curiosity."
- Soaring composites: "After moving into the automotive and construction industries, composite materials are changing the shape of aerospace. Lightweight and durable, these mixtures of fibers and resins adjust to complex shapes while requiring less labor than the metals traditionally used."
- Biotechnology and therapy: from the mirage of genomics to the promises of stem cells: "Medical applications of biotechnology cover a range from basic research to diagnostics and therapeutics."
- Technoscience and society: the case of nanotechnology: "Nanotechnology is sometimes presented as a new industrial revolution, promising a range of extraordinary
applications, with bottom-up assembly of the universe through "molecular manufacturing" (also called molecular nanotechnology, or MNT). Governments consider nanotechnology a strategic area and are funding major programs. The new technology, however, is challenging relations between science and society, and citizens must participate in the decisions that will shape the future."
CreditAgricole_Eclairages_julyaugust2010

Thinking ‘outside the box’ on economic policy

- "The markets are currently imposing on Europe a more brutal tightening of fiscal policy earlier than expected. But that does not mean that the two other constraints have disappeared: central banks should normalise the settings of their monetary policy as soon as conditions are met, while there is a ‘strong obligation’ to maintain a certain level of growth. How this can be done is not at all clear, and there are fears that the markets will find it difficult to extract themselves from this new ‘Bermuda Triangle’ – not forgetting that the triangle can easily shift from one place to another within the region formed by the advanced countries."
- "Recent European experience shows that the management of fiscal policy appears to be a more complicated issue than previously thought: how is the decision made when to cut off stimulus and start coming back to fiscal discipline? Cutting it off too soon is taking the risk of the economy plunging into a new downturn; letting it run for too long could build more investor fears and create a hard landing scenario. Defining the main risk between Scylla and Charybdis is never easy. Perhaps the choice should depend on the importance of both private domestic savings and the ability to attract foreign capital."
- "The decision of the ECB to purchase government bonds on the secondary market has triggered a debate about the impact on its credibility. The latter would be reduced because of too close proximity to the behaviour of governments. From an academic standpoint, a distinction has to be made between an environment of high inflation or of very limited inflation. In the face of high inflation, often related to excessive monetisation of government debt, a central bank’s independence is its cardinal virtue; if very limited inflation is associated with weak growth and fiscal austerity, greater co-operation between the central bank and the government is more easily understandable."
- "The link between the sovereign debt crisis and banking crisis has been borne out historically. However, the aim of the rescue plan for member states from the European Union, with IMF support, no doubt changes the nature of that link. In fact, the plan is designed to head off for a period (almost two years in the case of Greece) the emergence of liquidity
risk for the Greek Treasury, with the breathing space gained being devoted to reducing solvency risk via credible public account rebalancing plans. For a short time, therefore, the plan staves off the transfer of risk from the sovereign to the banking sector. It is, in fact, a sort of ‘mutualisation’ of risk between sovereigns: from the weaker to the healthier. In this respect, it is probably not entirely legitimate to link the two types of risk so strongly."
CreditAgricole Macro Prospects 2010Q3