US and emerging markets could sidestep euro fallout, Neptune’s Dowey says

Emerging markets and the US could grow better than expected in 2012 despite the eurozone remaining a substantial threat to the global economy, Neptune’s chief economist argues.

James Dowey
James Dowey

James Dowey says there is a “real possibility” that both regions, which are the drivers of global economic activity, will see growth come in above the current consensus expectations this year.

“Emerging economies have spent the past two years tightening monetary policy and normalising their fiscal balances,” he explains. “Now they’re facing headwinds from Europe they’re loosening policy on both those fronts and it seems to be working.”

Dowey also says the US has the chance of a significant improvement in its economic prospects. Recent months have seen a steady strengthening in US economic data, with manufacturing numbers climbing to seven-month highs and private-sector employers adding 243,000 jobs during January.

But the economist says the situation in Europe remains “pivotal” to world growth, warning: “European politicians retain the ability to derail the global economy.”

Neptune’s base case scenario for Europe sees the continent’s banks continuing with their deleveraging efforts, which will create a moderate recession in the region. This would hamper US growth through the two’s financial linkages and slow China’s expansion through trade channels.

Figures published by European Union statistical office Eurostat show that economic growth in the eurozone contracted by 0.3% in the last quarter of 2011.

Dowey adds the impact of a European recession would be manageable in both the US and emerging markets, which should help to mitigate its effects and see downward pressures on growth limited to about one percentage point.

However, the political process in the eurozone is creating additional risks to the outlook.

“This is fundamentally a negotiation between conflicted parties and those situations tend to go down to the wire,” the economist says.

“Nobody has an interest in this thing blowing up but equally nobody has any interest in solving things right now because everyone still has gains they want to make.”

Dowey says a more extreme outcome would emerge if the eurozone’s governments disagree “irrevocably” – leading to unilateral default, exit or disorderly non-resolution to the crisis – or the European Central Bank allows a systemically important bank to fail.

“If that happens then all bets are off – economic activity halts from California to Mumbai, transmitted through the global banking system and trade links,” Dowey warns.