Saxo Bank’s Q2 outlook: Continued low growth will end politicians’ free-ride

Three months into 2013 and growth projections are already being lowered across the globe according to Saxo Bank, the multi-asset trading and investment specialist. The Bank writes in its TradingFloor.com Insights Report for Q2 that the world is looking at a 2013 that is, from the outside, a mirror image of 2011 and 2012 but with a difference: The German election in September.

Low growth rates will increase the social and political tensions in Europe as seen by the recent bail-in/bail-out of Cyprus, in which everyone lost: the depositors, the Troika’s credibility and any hope that the Eurozone has a real plan for dealing with this crisis in anything other than piecemeal fashion. The political consensus to buy time is running out as the policy makers increasingly will have to deal with intolerably high and rising unemployment and the lack of growth or reforms that will move economies forward.

The TradingFloor.com Insights Report features a comparison between the major Eurozone economies, the UK and the US, which reveals that the US ranked third behind Spain and Italy when it comes to reducing public sector spending last year. Meanwhile, the UK, France and Germany all saw increased public consumption – in that order.

Despite the decline in public spending, the Bank expects moderate growth to continue in the US in 2013 to the tune of 2%, down from 2.1% last year, before accelerating to 3% in 2014. The US economy may not be exactly stellar, but at least moderate growth is on tap. The outlook is decidedly more downbeat across the Atlantic, where the Eurozone must resign itself to the fact that the recession is destined to continue.

The Bank expects that economic activity in the EU will decline by 0.3% in 2013 after last year’s drop of 0.5%, while the unemployment rate will rise throughout the year and average more than 12%. The resulting slack in the economy will keep inflation subdued. The economies of Italy and Spain will remain weak, but it is the French economy that concerns the Bank’s strategists the most, particularly because of the French government’s failure to implement reforms.

Steen Jakobsen, Chief Economist at Saxo Bank, says: “A free rider in economics refers to someone who benefits from resources, goods, benefits, or services without paying for the cost of said benefit. In the first quarter of this year, the world moved from a free-riding concept to blatant public disagreement on how to keep the party going. Stock markets have hit new highs but employment and growth, the two factors that really matter in the long term, are not improving.

“This means that the free-ride for politicians is over. They now need to do something they have never excelled at: face the facts and devise real solutions. As they are unlikely to rise to the task, let’s hope they don’t get in the way of the micro economy, which will have to do it for them instead.”