Europe is “turning Japanese, they really think so.”
Pershing, in collaboration with Roubini Global Economics, has issued a new report that claims Europe faces the threat of “Japanization” and a lost decade; increased savings levels in developed markets will depress investment returns; and developed markets face a 1% growth rate in 2012 and 2013.
The report, titled “Rebalancing and Recovery: The Slow, Risky Road to Global Growth,” finds that “global deleveraging and balance sheet repair will depress worldwide economic growth,” threatening a lost decade for developed markets.
It goes on to state that private and public deleveraging in developed markets will produce increased savings. A result of this “cash stashing” is that the Eurozone will become a net creditor to emerging-market nations—the opposite of the situation in the past decade, and to developed nations in deficit, such as the U.S. and U.K.
The glut of savings will push down investment returns in emerging-market nations and will cause asset bubbles to form, disrupting their economies. They will exacerbate the ultralow interest rate environments in developed countries, hurting savers, encouraging risky investment behavior and depressing demand.
This shift to savings, particularly in the Eurozone, creates the risk of a Japanese-style lost decade, when the bursting of an asset bubble and chronically low interest rates resulted in a hollowing out of its economy. While deleveraging is a key goal of most government policy, it could lead to chronically sluggish economic activity.
Additionally, as the global economy continues to undergo structural shifts, global growth will remain elusive in 2013.
The report foresees a sustained period of below-trend growth, with 3% growth globally in 2012 and 2013, 5% for emerging markets and just 1% for developed markets.
The report suggests that big surplus markets, such as Germany and China, and other traditional creditor nations, should focus on restructuring to stimulate consumer spending. It also notes that the U.S., which is no longer at the epicenter of the financial crisis, will likely continue its slow recovery. The speed of this recovery will depend on the impact of fiscal, monetary and political policies, as well as major economic concerns.