One on One with Michael Hume, Chief European Economist at Lehman Brothers
Friday, September 12, 2008
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SUSIE GHARIB: Well, the weak U.S. economy is impacting economies overseas and many analysts are now predicting Europe will fall into recession. European Union finance ministers said today they underestimated the fallout from the downturn in the U.S. Well, to get a check on the outlook, I recently talked with Michael Hume, chief European economist at Lehman Brothers. I began by asking him just how bad is the European economy.
MICHAEL HUME, CHIEF EUROPEAN ECONOMIST, LEHMAN BROTHERS: It's pretty bad, unfortunately. The European economy experienced quite a contraction in economic activity in the second quarter. And the indication so far suggests that things haven't really gotten any better in the third quarter. So the technical definition of a recession here is two quarters of negative growth, and it looks as though Europe is heading in that direction. There are some glimmers of light at the end of the tunnel. We have got the exchange rate coming down thanks to the dollar being resurgent again. And of course oil prices have come off. But in our view it's only if the European Central Bank bites the bullet and starts lowering interest rates that we will get much benefit from that.
GHARIB: Well, actually, we saw that the European Central Bank kept interest rates steady last week. Do you expect them to cut rates any time soon to boost growth?
HUME: I think it will be a little while yet, I mean, we are expecting them to signal at its December meeting that it's ready to cut rates and we expect that to be implemented in January. See, the ECB always seems to give you a one-month sort of warning of any change in interest rates, but that's still a few months away and its a little bit concerning that we're not getting a further movement of language from the European Central Bank to that effect. And our suspicion is that they just want to wait and see whether the oil price decline is sustained, just see some of the inflation numbers come off a little bit more in Europe. But once they do, then they will move relatively quickly.
GHARIB: How would you describe the economic health of the European consumer? Are they spending money or have they turned cautious?
HUME: The European consumer never really came out of its shell, it has always been a little bit of the laggard during the recovery phase. And now that things have turned down, the European consumer has really given up whatever strength it had fairly easily. Now part of the reason for that is the very strong rise in inflation which has eroded real incomes quite strongly in Europe. But also I think there is a confidence effect and that seems be coming through quite clearly. So for the European consumer, it is fairly downbeat days.
GHARIB: How is the European job market? Are businesses still hiring?
HUME: Yes. The jobs market is holding in reasonably well, particularly in Germany. There have been some very sharp movements in some of the economies such as Spain, where the unemployment rates jumped several percentage points. But on the whole, it's holding in reasonably well. But I think that it's important to point out that the European labor market takes longer to reflect developments in the economy more generally. In the United States, the links between the economy and the jobs market tend to come through quite quickly, but because of all the protective labor legislation in Europe, it takes a little bit longer over here.
GHARIB: Michael, how would you describe the credit climate? Are banks lending? Are consumers borrowing?
HUME: Yes. The credit climate is markedly better in Europe than in the United States. Banks have been tightening credit conditions, but it does vary depending on which economy you're looking at. If you're looking at Spain or the United Kingdom, it certainly is the case that banks have been tightening credit both to consumers and to the corporate sector. But if you turn to Germany, for example, very little sign of that happening at all and the credit growth has been robust. So it's a much more mixed picture in Europe, some tightening of credit conditions, but nowhere near as marked as in the United States.
GHARIB: You mentioned at the beginning of our conversation that the European economy is headed to a recession. Do you have any sense of how long it will be or how short-lived it will be?
HUME: Well, we are expecting it to be quite shortly. We do think that the drop in the oil price will provide a little bit of a boost in the consumer by the end of the year. And then as I say, if inflation comes down and the European Central Bank feels that there is scope for lowering interest rates, then that should really provide quite a strong boost of confidence early next year and into the middle of the year. So we are hoping that it's a short-lived recession, but there are risks certainly to the downside in the near term.
GHARIB: All right. Michael, thank you so much for your insights and analysis. We really appreciate it.
