Swanson of MFS Sees ‘Garden-Variety Recession’ in Europe

Thanks to a number of factors, including world profit margins on the rise and an expansion, although not a recovery, in the U.S., the next six months present “not a terribly bearish story,” James Swanson of MFS Investment Management said on a conference call Monday.

Europe’s problems, said Swanson, a chief investment strategist, have their root cause in the lack of a competitive cost structure based on labor. He added that it would likely take an actual default for European political leaders to do more than “Band-Aid the problem” by enacting temporary fixes.

Still, rather than predicting collapse, he said the situation was “workable in the short term” if the eurozone held on, and that he anticipated a “garden-variety recession—two quarters, at most three”—not on the scale of the Lehman Brothers meltdown. Following that, Swanson said, Europe would see a mild recovery; it “can’t have a robust recovery because unit labor costs are too high.”

China may be slowing, he added, but not crashing. Tight monetary policies on the part of the government coupled with eurozone issues caused the slowdown, but the change in monetary policy, intended to lower interest rates and restore liquidity to the banking system, will bear fruit in “a few months.” In addition, more dramatic rate cuts in Brazil and India will also generate change.