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Friday 17.11.2017 | Name days: Uga, Hugo, Uģis

Economist: the world’s largest experiment will continue

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Dainis Gaspuitis

The global economic crisis is not backing away – the summer downslide in Europe has increased in force, which increased risks for global economic growth. The desired recovery is slowed by consolidation of private and public sector debts in developed countries, says SEB Banka economist Dainis Gaspuitis.

“There are also certain political uncertainty risks that are related to the debt crisis of the Eurozone, America’s fiscal policy issues, changes in China’s government and the current situation in the Middle East. The situation can still deteriorate if the situation in the corporate sector does not improve,” – explains the economist.

He adds that there are different growth rates currently noted in global economy. On the one hand, USA’s economy has stabilized, as well as economic growth in developed countries, including China, could also become more rapid. On the other hand, a negative economic dynamic remains in Eurozone. Development is worn out even despite the support of the European Central bank (ECB) and the achieved improvement in competitiveness, current accounts and state finances.

Central banks in Japan, Britain, USA and Eurozone increase attempts to develop economy, setting new monetary stimulation volume records.

“Therefore it should be concluded that the world’s largest experiment will continue. During the last five years, balance of central banks has increased by more than $11 trillion. The goal of this quantitative pillow measure is to lower the influence of state and private sector debt consolidation and avoid the spiral of deflation, securing profitability for the financial system,” – says Gaspuitis.

The bank expert believes that the monetary stimulation policy will, most likely, not threaten the stability of the price and finance system. The risk of this measure is more likely the possibility of damaging the price setting mechanism on financial markets, which would make resource division in economy more complicated in the future. Also, this policy could reduce the pressure on the political system in order for it to realize reforms and required measures for budget balancing. The countries’ ordered and different monetary stimulation measures could create unwanted exchange rate alterations, which could contribute to tendencies of protectionism. Given the weak growth, low resource use and realized monetary policy, the period of historically low interest rates will continue.

Indexes of Eurozone’s economy remain weak. Next year’s GDP growth will be -0.2%. Growth of 0.8% is expected in 2014. Unemployment continues to increase and reach a historic record – 12.4%. In spite of fiscal stimulation measures of more than 0.5% of GDP, Germany’s growth will be weak next year. France’s economic policy is being criticized more and more. Economic downslide is a serious obstacle for attempts to stabilize the Euro system. However, differences in workforce expenses between different Eurozone countries have begun to decrease. This will help reduce current account deficit and inequality.

The new Direct cash transactions covered bond purchase program of the ECB is necessary to prevent a new government profitability crisis. It is likely Spain will apply for financial assistance program within the next few months and ECB will begin the procurement of bonds. Greece’s perspectives remain unclear. The country needs a debt write-off, but given the weak parliamentary majority, which support “tightening the belt” policy, there is a risk of new elections, predicts the economist.

“The December 13-14 summit will have a big meaning in all this. It is expected that directions of Eurozone’s development will be marked there. Such links usually include many conflicting questions, including those of constitutional nature. Euro stability and the future will be largely dependent on how convincing support of federalism and centralization ideas will be. Given the current complicated conditions, it will be difficult to ensure enthusiasm of countries to support this strategy. Also, scepticism about the future of Euro will continue to delay economic activity,” – Gaspuitis is certain.

“Estonia’s, Latvia’s and Lithuania’s GDP in 2013 and 2014 will grow by 3.5-4.5%, which is close to the potential level. It will be maintained by a relatively good internal demand, which will balance demand changes on foreign markets, even though the Baltic States’ competitiveness allows for predicting further expert development. Real income will grow and unemployment reduction will continue to reduce. Inflation will remain low in Latvia and Lithuania. Estonia will combat inflation of 4%. There are more and more signs that show Latvia will join Eurozone in 2014,” – says the economist.


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