2012: Split Down the Middle

Manoj Pradhan,Morgan Stanley

The recent uptick in PMI numbers in the US and the EM world has many wondering whether the growth slowdown is over and done with. While this is likely true for some EM economies, particularly LatAm economies, we would caution against taking such a benign view of these data points at this stage for the rest of the EM world. Risks to external demand from Europe as well as the US (where we expect growth to slow down to about 2% in early 2012) are still to the downside. EM domestic demand is still slowing down thanks to weaker external demand and domestic tightening in 2011. Many policy-makers were less willing to unshackle growth in 2011 due to concerns about inflation but have much more legroom now that EM inflation is on its way down. Growth moderation will likely begin some time in 2Q for the EM world, in our view.

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FX: Stronger Euro

John Hydeskov,Chief Analyst, Danske Bank

As expected, the ECB decided not to touch interest rates at its meeting during the week. This makes a lot of sense in our eyes. The eurozone may be in recession, but it is only a mild one and should prove short-lived. Compared to 2009, it is more of a slowdown than anything, and interest rates are already low enough to help stimulate both consumption and investment. Keeping something in reserve in case the crisis escalates further seems like a good idea. The ECB's “non-standard measures” have also had an extraordinarily positive impact on the euro crisis. The 3Y liquidity tender in December was well-received and has brought down yields on Italian and Spanish government paper used as collateral at the ECB. A further tender is planned for 29 February and is also likely to prove popular. We expect the ECB to continue to favour non-standard measures and keep the benchmark rate at 1%.

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None Dare Call it QEIII

John E. Silvia,Chief Economist, Wells Fargo

During the last two weeks, commentary from a number of Federal Open Market Committee (FOMC) members and a Federal Reserve White Paper on housing suggests that the odds of a QEIII move in the form of large-scale purchases of mortgage backed securities have risen.

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Canada – Household Debt a Growing Peril

Diana Petramala, Economist,TD Bank Financial Group

Canadian housing and trade data released this week pointed to a moderation in economic growth to 2% annualized in the final quarter of 2011, following a 3.5% gain in the prior quarter. Signs of continued economic growth are encouraging, but there appears to be a growing vulnerability. The key drivers of economic growth in the fourth quarter were consumer spending and housing activity, not a desirable outcome for an economy facing risks with high household indebtedness and an overheated housing market.

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Compiled byDavid Song, Currency Analyst