“The optimistic view on North America contrasts with the much more fragile outlook in Europe, where weak consumer confidence, climbing unemployment and tight credit all point to further falls in activity,” is the summary of the OECD’s (Organization for Economic Cooperation & Development) relative perspective of Europe versus the US and Canada. This also though raises the questions why has the Euro currency been making a small comback versus the US Dollar over the last month or two?

 

Global – G7 Growth Forecast:

“Economic growth in the G7 countries is expected to be firmer through the first half of 2012, but the recovery remains fragile and will likely proceed at different speeds in North America and Europe, the OECD said in its latest Interim Economic Assessment. The Assessment, presented in Paris by Chief Economist Pier Carlo Padoan, says the G7 economies are projected to grow by 1.9 percent in both the first and second quarters of 2012, although a strong variance in outcomes is expected across this group of countries. (See the Chief Economist’s presentation).  “Our forecast for the first half of 2012 points to robust growth in the United States and Canada, but much weaker activity in Europe, where the outlook remains fragile. We may have stepped back from the edge of the cliff, but there’s still no room for complacency.”

 

US & Canada:

“In the United States, the ongoing rebound in employment, stronger consumer confidence, higher equity prices and credit growth are underpinning the recovery, with growth projected at 2.9 percent in the first quarter and 2.8 percent in the second. Canada is projected to grow by 2.5 percent during each of the first two quarters.”

 

Europe Still Lags & Risks”

“The optimistic view on North America contrasts with the much more fragile outlook in Europe, where weak consumer confidence, climbing unemployment and tight credit all point to further falls in activity. The OECD projects that the euro area’s three largest economies -  Germany, France and Italy - will shrink by 0.4 percent on average during the first quarter, before a moderate 0.9 percent growth recovery in the second quarter.”

 

“Seen individually, the German economy is expected to accelerate through the first half of the year, with growth of 0.1 percent in the first quarter and 1.5 percent in the second. The French outlook is more muted, with a -0.2 percent reduction in the first quarter followed by 0.9 percent growth in the second. In Italy, weak industrial production and household sentiment suggest recession for the first two quarters of the year, but the most recent indicators have been more positive, resulting in slightly better projected growth for the second quarter,” according to the OECD.

 

Risks: From Spiking Energy Prices to Slowing China:

A number of factors threaten the recovery, including rising oil prices, weakening activity in emerging market economies, notably China, and a slowdown in world trade growth that reflects weakening global demand. “Government action will continue to be critical, particularly in the euro area, where unfinished policy business on fiscal frameworks, financial firewalls and fundamental structural reforms must move ahead,” Mr Padoan said.

 

Euro vs. Dollar:

The Euro has rebounded versus the US Dollar in last 2 months, as if to contradict the OECD projections. However, this Euro rebound reflects more the currency market trading trends and interest rate differentials. The Euro started to rebound on same moment that Fed Chair Ben Bernanke committed to keep US interest rates at current levels through 2014. This signaled a “carry-trade” opportunity in perspective of many investors/speculators (who would borrow in US Dollars and then invest in a higher interest yielding currency which includes Canada$, Australia$ and even the Euro). The speculative trend toward the Euro though is countered by risks associated with the evolution of the Eurozone structural adjustments/mechanisms. There is not likely to be a further reduction in Eurozone rates as even if above the US Dollar, they are still very low. Nonetheless, the broader European economic malaise (beyond exceptions as Germany and the Netherlands) is likely to persist for some period. Thus, as we get closer to the closing of the “carry trade” opportunity and 2014, we would expect the US Dollar to continue a longer term trend up with respect to the Euro. The major risk to the US Dollar is not so much economic fundamentals (which are not necessarily solid but neither soft). Rather, efforts of China and some other BRICS to dethrone the US Dollar as primary global reserve currency.  See Blog for Video Report - http://diplomaticallyincorrect.org/films/blog_post/brics-pose-new-challenge/49338. The counter side though is the OECD anticipates that the Euro bailout fund will have to be even bigger than currently on the table, particularly as offered by Germany.

 

By Ambassador Muhamed Sacirbey – Follow @MuhamedSacirbey

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Link to OECD Report: http://www.oecd.org/document/42/0,3746,en_21571361_44315115_50008746_1_1_1_1,00.html