Ethel Hazelhurst

Recession in the euro zone will be deeper and longer than anticipated, according to Steve Barrow, the head of Group of 10 research at Standard Bank. However, the US should avoid the worst of the “fiscal cliff” and would probably grow 2 percent next year, he added.

At a presentation in Johannesburg yesterday, Barrow predicted that less than a third of the $607 billion (R5.4 trillion) in tax increases and spending cuts scheduled for next year would materialise in the US.

The poor outlook for the euro zone has implications for South Africa’s exporters because the region is one of their biggest markets. Modest growth in the US will do little to compensate for the fall in demand from the EU.

Comparing the merits of US and euro zone policies, Barrow said the US, which avoided austerity measures to reduce its debt, had “got it right”.

He said the euro zone was trying to reduce debt “too quickly at too high an economic cost to the region”.

And he warned that the consequences would be a “destructive recession in the euro zone”.

The full impact of the fiscal cliff would be equally damaging to the US economy. But the impact would be blunted because not all the measures would be implemented, he said.

The US has more room to manoeuvre. Unlike the euro zone countries, the US is able to print money to pay its debt if it needs to, while each euro zone country issues debt in euros, a currency which is under the stewardship of the European Central Bank.

Barrow noted that, normally, fiscal austerity automatically triggered relief in monetary policy in the shape of lower interest rates, as demand for money fell.

However, in the euro region, official rates were already close to zero, so little relief was available, Barrow said.

He pointed out that the International Monetary Fund (IMF), which had traditionally put the fiscal multiplier at 0.5 percent, had “reworked the figures”.

The fiscal multiplier is the rate at which economic growth changes in response to changes in government spending.

IMF chief economist Oliver Blanchard said recently that fiscal multipliers were substantially larger than usual because the impact of fiscal cutbacks could not be offset by looser monetary policy. Blanchard said the multipliers had ranged between 0.9 percent and 1.7 percent since the 2008/09 global recession.

Discussing investment, Barrow said global investors still preferred bonds over equities. He said the low-growth environment globally made equities less attractive, while inflationary pressures were “generally absent” internationally. A low inflation environment is positive for bonds.

At some point the situation would change, but this was not imminent because “credit growth is still very subdued” in developed countries. In the euro zone credit is contracting.

Traditionally, bonds have been seen as a safe haven in troubled times. But a contrarian view comes from Investment Solutions chief strategist Chris Hart. At a presentation in Johannesburg on Tuesday, Hart described bonds and cash as “the epicentre of risk”.

He noted that, in the low interest rate environment, bonds and cash were returning less than inflation.

Moreover, they depended on confidence for their value, while assets like property and precious metals had intrinsic value, he said. He also saw merit in companies “that have recognisable value”, in terms of demand for their goods.