Baltic Business Research

Vacation time gets closer, particularly for us in Northern Europe where we usually enjoy quite nice – but too short-lived – summers. Time to escape for a while from economic worries – worries that won’t disappear during summer time. I should, however, emphasize that this blog is about future risks as they currently should or could be summed up – and not about hope and thinkable positive news that may show up sooner or later. Ten (future) possible events or developments mean particular concern to me.

1. Stock markets. Stock markets seem to be highly valued in quite a number of countries. Stocks in the U.S., for example, are at historical highs in relation to GDP. The still unanswered question: What is the real impact of high global liquidity on stock (bond) prices?

2. Bond markets. Low 10-year bond rates around 0.60 (Japan), 1.40 (Germany), 2.60 (U.S.) and 2.80 (Italy) should not be considered as normal – at least according to my own historical experience and understanding, despite all the ongoing deflation chat.

3. Deflation fears. It’s really not for the first time I am analytically confronted with deflation fears like the current ones. Sure, deflation concerns should never be neglected. But how much can still lower interest rates do about the problem? And how far are we away from a more dangerous deflation?

4. The U.S. economy. Will the probable second-quarter GDP rebound pave the way for a really sustained and reasonable recovery after the recent, more dampened development? Higher interest rates could – sooner or later – mean a future threat to the U.S. economy.

5. The Japanese economy. No one can make me believe that the Japanese economy is on a fundamentally healthy track after having closely followed the Japanese problem during more than 20 years. Some achieved slight structural progress remains insufficient – and Abenomics is (still) not strong enough to do the whole work.

6. China. The Chinese economy can be followed monthly on my blog called chinaresearch.se, edited by Linnaeus University. Ongoing concerns are motivated – even if major troubles cannot be expected in the short run. In my forthcoming blog for August, I will have a link to my latest paper called “Chinese Reform Policy in a European Perspective”.

7. Southern Europe/France/The EU. The southern parts of Europe still have to be observed. However, the French economy may mean more troubles in the future. Uncertainty about EU’s future leadership and certain referenda – like the Scottish one this fall and a possible British one after the general elections – give also reason for concern. The doubts coming from the UK should not be underestimated.

8. Germany. Germany is currently not a concern in GDP-growth terms (see also my recent analysis on the website of the German-Swedish Chamber of Commerce in Stockholm, Tysk-Svenska Handelskammaren). In recent days, several German forecasters published upward revisions of their forecasts. But how sustainable is the current German growth optimism? I have my doubts. This does not mean, however, that I prefer a pessimistic outlook on the German economy.

9. The ECB/The Fed/Swedish household debt. Last week, the ECB entered another new road with unknown destination. By nature, I am very skeptical about the idea of directing credits in a certain direction which the ECB decided to do last week (an approach – by the way – that finally did not work in Sweden some 30 years ago).

Atif Mian and Amir Sufi – professors in Princeton and Chicago – point in their new book “Debt House” (2014) exactly at this point, i.e. that the recession in the U.S. after the subprime crisis to a high extent could be related to an insufficient demand for private credits – and not to an insufficient supply of new credits. If this conclusion will receive further (strong) evidence, monetary policy by the Fed and partly by the ECB could indeed have had the wrong approach and/or objectives in the past few years. In the Swedish case, on the other hand, things are not quite comparable to the conclusions by Mian/Sufi.

I am looking forward to check out further the analysis and conclusions of “Debt House” which in my view seems to be much more worth-while reading than Piketty’s sometimes quite inconsistent bestseller which everybody talks about right now (if you want to choose among these two books). “Debt House” should be particularly recommended to all the Swedes who do not see the current bubbles on private household’s debt and home markets as a problem. But what do we know about the future?

10. The completely unknown concern. What could it be? This kind of thinking is not really nice or concrete – but it cannot be neglected when looking at international (global) and national risks after the forthcoming summer.

 

To sum up: Let’s hope that (some of) the above-mentioned concerns will decrease in the forthcoming months. I’ve never been a pessimist. But such an attitude should not rule out realistic concerns, assumptions and predictions! Enough challenges are still in place – challenges that may decrease but also increase over time.

My own, five main concerns for – especially – the medium and longer term are (unranked):

¤ stock/bond markets, particularly after having left the ultrasoft monetary policy stance,

¤ China and its goal conflicts during the marketization/financial deregulation process,

¤ France,

¤ other EU distortions,

¤ household debt and private home markets in Sweden.

Anyway, enjoy your summer holiday – whenever and wherever!

Hubert Fromlet
Senior Professor / Linnaeus University (Linnéuniversitetet)

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