One on One with Michael Hume, Chief European Economist at Lehman Brothers
Tuesday, January 29, 2008
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SUSIE GHARIB: World economic growth is expected to slow sharply this year. According to a new forecast out today from the International Monetary Fund, the world economy will slow to a 4.1 percent growth rate in 2008. Earlier today, I talked with Michael Hume, chief European economist at Lehman Brothers and asked him for his economic forecast for Britain and Europe.
MICHAEL HUME, CHIEF EUROPEAN ECONOMIST, LEHMAN BROS. Well, for the euro area, we're looking for quite a sharp slowdown from 2.7 percent last year to 1.5 percent this year, so a very big drop and in the United Kingdom from 3.1 percent to 1.7, so again a very big drop, much more even than in the United States, so quite a sharp slowdown.
GHARIB: What impact Michael, would a U.S. recession or a recession like economy have on Europe?
HUME: We're factoring in an economy in the U.S. that is close to recession anyways. So if it just hits slightly into recession, it wouldn't make a big deal of difference. Of course if we went down the scenario of a more protracted deeper recession like that experienced in 1990-91, we'd be tempted to pull down those numbers quite sharply again. The probability of a recession in Europe would rise quite sharply in that scenario.
GHARIB: So you don't agree with that whole debate on the decoupling of Europe and the U.S., that Europe would not be hurt by a severe economic downturn in the U.S.? You don't agree with that, right?
HUME: No, we don't agree with that. We think that the U.S. economy has already slowed down. The effects haven't really been felt on Europe until now. I think that if the U.S. went into recession, we'd feel the effects even more.
GHARIB: How would you describe the employment situation in Europe and consumer spending?
HUME: Fortunately, the consumer situation has been quite downbeat. We haven't really seen any recovery in the consumer side of things despite two or three years of very good growth up until now. That's not because the labor market or employment situation has been bad. We've seen unemployment come down to 25-year lows, confidence in the labor market before the credit crunch took hold was also very high. But for some reason -- and we think it's mainly because of weak income growth -- consumers just didn't go out and spend. Our concern is that with the credit crunch having unfolded, equity markets looking nervous, that now is not the time for thinking that the European consumer can come to the rescue.
GHARIB: Well, we're wondering whether the central banks in Europe will come to the rescue. A lot of our economists here were expecting the European central bank and the Bank of England to follow the Federal Reserve and to cut interest rates and that didn't happen. What's the timetable on that?
HUME: Well, unfortunately Europe's central banks are very much tied to the principle of inflation targeting. Unlike the Fed, we don't have central banks that have got one eye on inflation and the other eye on the labor market. So what it means is that with high inflation because of high oil prices, central banks are reluctant to come to the rescue. We've already have one cut from the Bank of England. We're expecting two more, one in February and one in May. The ECB has been very reluctant to give any indications that they're contemplating a rate cut. But even so, we think that they can change their language relatively quickly. Back in 2001 it only took them four months to turn around from sounding very hawkish on rates to cutting rates. We're expecting that it might take a similar amount of time this time around. So we look for a cut in June in the ECB and then a follow-up move in September as well.
GHARIB: Your expectation is that the Federal Reserve here in the states will cut interest rates again. What is the reaction in Europe to this aggressive interest rate cutting program that's going on in the states and the impact that it may have, the ripple effect it may have on European economies?
HUME: Well I think on the one hand there's relief that the U.S. central bank is doing all it can to forestall recession. On the other hand, we're wondering what does it know that we don't? I think that there are concerns that may be things are turning out worse than we previously thought and that that could have damaging implications for the European economy. So we're glad it's on the case, but we're worried about how severe that case might be.
GHARIB: So when do you think the UK and the European economies will begin to recover and really turn around and start growing again?
HUME: Sadly we're not looking for much of a turn-around in the outlook until the end of next year. Partly that reflects the fact that it's a global slowdown that we're likely to be undergoing and that these are problems that are shared between the U.S. and Europe. In particular we're thinking about the high level of household debt and that may take quite a while to work off even if you get rate cuts in Europe as well as the United States. We're expecting similar growth rates next year as we're looking for this year.
GHARIB: Michael, thank you very much. We appreciate your time.
HUME: Thank you.
