Reasons to be skeptical – global financial outlook at year's beginning

Unlike last year, the beginning of this year is marked by a sentiment of hope, partly explainable, that the developed economies will normalize soon. However, the prospects, at least for the first quarter, remain to be uncertain. The recovery of the word's economies has been pushed from behind too eagerly and the side effects of the liquidity injected last year by the central banks could bubble up already this year, Financial Brains director PhD Sveatoslav Mihalache has commented for Info-Prim Neo. [Four reasons to be skeptical] “The euphoric sentiments fueled by the holiday season at the beginning of the year, says Mihalache, contradict the realities”. Sveatoslav Mihalache has four reasons to remain skeptical. First. The global crisis is far from coming to an end. According to recent IMF estimations, the potential of the “toxic” assets is around 3.4 trillion dollars. But the losses incurred by financial institutions have so far materialized at a half of this figure. This means that the prospects of the financial entities will be affected this year as well, and so will be their capacity to offer loans. Second. The depth of the recession is bigger than expected. It was only last year, in March, that the bottom of it was reportedly reached, with the global economy shrinking by 75 percent. Third. Despite certain improvements in the United States, the Americans' level of consumption is expected to remain limited, in the aftermath of a long-lasting shock. The share of consumption in the United States' GDP could drop below 5 percent. And since the Americans are those who set the pace when it comes to consumption, which is part of their lifestyle, increased levels of consumption elsewhere on the globe, say in China, will not be able to fully counterbalance these tendencies in the United States. Fourth. Even if China saw some economic growth last year, it wasn't able to alleviate the state of affairs globally. Moreover, the Chinese investments last year were concentrated into the financial sector, making up 45 percent of GDP. The borrowing levels of the Chinese banks, most of them administrated by the government, rose significantly and the eventuality of some problems in recovering those loans could affect the Chinese state as well. That eventuality would trigger another wave of the crisis, Mihalache said. [Euro vs. Dollar] A comparative analysis of the economic prospects in the United States and the European states apparently favor the American currency. The US economy is expected to register improvements, receiving support from industry and constructions, while Europe is faced with a series of problems. In the US the equities of households rose, after two years of decline. There are signs of recovery on the home market as well; the combination of moderate prices, low rates and tax relief should afford the sector a constant growth in the months to come. Also, some changes in the fiscal and monetary policies are expected to occur, which can be interpreted as another good sign. However, it would be unfair not to mention the discouraging tendencies in the consumer and public spending, and the gloomy statistics on the job market, which will continue to restrain economic growth in the US. The European economy walks into the new year with a cloudy sky overhead, after in the last few months the rating of such countries as Greece, Spain and Ireland dropped as a result of their incapacity to deal with budget deficits exceeding 10 percent. Germany and France, considered to be EU's financial locomotives, won't have enough steam to compensate for these problems, while the structural reforms required in this situation will take a while. Adding to these are the discouraging trends on the job market and the poor consumption levels. Considering the tendencies mentioned above, Financial Brains think that in the first quarter the euro will trade against the dollar in a corridor between 1.39 and 1.47. The level of $1.4220, which is crossed by the Fibonacci line, was tested repeatedly over the recent days. As long as it resists, the euro can recover the positions lost lately and go up to $1.4560. Higher, the $1.47 mark appears to be a very strong resistance level. [Leu vs. Dollar] Recent statistics on unemployment and the the trade gap, as well as the large budget deficit, are not at all encouraging. However, says Sveatoslav Mihalache, the devaluation of the leu is not the best solution to respond to this situation, as it will affect consumption. The trading corridor for the leu/dollar pair in the first quarter is predicted to be 12,00 – 12,50 lei. The euro will trade around 17,15 – 17,95 lei. - For further details visit www.fb.md or www.financialbrains.eu