Europe moving towards recession says expert

By Arthur Macdonald, Gulf Daily News, Manama, Bahrain 

Nov. 30--MANAMA -- The world economy has clearly lost momentum with inflation slowing in emerging countries, while growth in Europe is likely to be zero next year and possibly the following year too. 

That is the view of Dexia Asset Management chief economist Anton Brender. 

Mr Brender was in Bahrain yesterday as part of his company's Middle East road show. 

"The euro sovereign debt crisis -- which has now clearly spread beyond the periphery -- is continuing to shake financial markets and while we do not expect the euro to collapse or disappear there is definitely a possibility that it could," he said. 

"It is now up to European governments to put the policies in place that will ensure the continuation of the euro but I believe that there is no country in the euro zone that wants to give up the single currency. 

"While trade spill-overs from the euro crisis are manageable, financial ones could be much larger especially if stress spreads to core euro countries. 

"Fortunately, emerging countries do have some leeway to stimulate their economies if needed." 

He said the euro zone was clearly moving towards a recession. 

"Activity has clearly lost momentum and a mild recession is now likely," he said. 

"To put an end to the sovereign debt crisis and avoid a deeper contraction, a political turnaround has to take place. 

"We believe it will take place in the coming month, but in the meantime, volatility will remain high." 

He forecast the US economy should avoid a double dip, but growth will remain subpar. 

"The fiscal debate will remain a source of uncertainty and could possibly trigger a new confidence shock in the US," he said. 

"The unemployment rate will stay elevated and the Federal Reserve should keep its accommodative policy, possibly launching more quantitative easing if the recovery seems at risk.

"In this environment, US 10-year interest rates will remain at their depressed levels for a while." 

He added that in spite of the global slowdown in the economy unless geopolitical risks materialise, oil prices have no reason to jump... but should not fall much either!" 

Global head of asset management Koen Maes said that equity valuation were extremely attractive to long-term levels but that volatile markets required active management. "Our preferred investment themes are high dividends, convertible bonds and alternative investment strategies." 

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UK body warns of risk of EU defaults

By MARK HENNESSY

DEFAULT BY a number of European Union states on hundreds of billions of euro in sovereign debt is now a "significant" risk, according to the UK's top official economic forecaster, the Office for Budget Responsibility. 

Describing "a disorderly outcome" to the euro crisis as "clearly possible", the office said a "serious escalation" could put the global financial system under strain, leading to tighter credit conditions and further depressing global output and trade. 

The risk of a euro collapse could not "be quantified in a meaningful way", it said, adding: "Suffice to say, the probability of an outcome much worse than our central forecast is greater than the probability of an outcome much better than our central forecast." 

The office, set up by British chancellor of the exchequer George Osborne, is highly influential, since it delivers verdicts on whether the UK treasury can meet its own targets. In the opening words of his autumn statement in the House of Commons, Mr Osborne said "much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debts". 

He insisted he would not budge from cutting public spending: "We will do whatever it takes to protect Britain from this debt storm, while doing all we can to build the foundations of future growth." 

Quoting the office - that there could be "a much worse outcome for the UK" if the euro crisis were to deepen - he said: "I believe they are right. We hope this can be averted." 

The office said the situation had "deteriorated significantly" since March. Euro area growth would be no more than 0.5 per cent next year, it predicted, adding that fears of sovereign debt default had intensified and led to British banks having to pay higher interest. 

Originally published by MARK HENNESSY, London Editor. 

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