As 2012 is winding down, many analysts and investors are trying to determine their economic forecast for the fourth quarter and fiscal 2013. While America has its own serious issues, let’s not forget that the eurozone could become a huge problem for many nations in 2013.
One thing that has been constant regarding the eurozone is that many analysts who have come out with an economic forecast have consistently been revising it downward. It’s extremely difficult to properly come up with a framework that is viable over the long term if the economic forecast one is using is flawed.
Another piece of data that might help shed light on the fourth-quarter economic forecast for the eurozone was the recently released business survey conducted by research firm Markit. The Purchasing Managers’ Index (PMI) for the service sector was 45.7 this month, far below the 50.0 level that separates growth and contraction. Not only has this indicator shown contraction for 10 straight months, but the service industry is accelerating its decline, too. (Source: “Eurozone Faces Deepest Downturn Since Early 2009,” Reuters, November 22, 2012.)
While the manufacturing PMI came in slightly above expectations, it also was below 50.0, which denotes contraction in that sector for the eurozone. Many analysts use this key piece of data in their economic forecast for not only the fourth quarter, but also next year. When creating an economic forecast, trends are important. We continue to see that declines are not only consistent, but they are also getting worse within the eurozone.
However, making an economic forecast for the eurozone cannot be done simply by one data point. There are other extremely important factors that will determine how strong the eurozone economy will be next year, as well as the euro currency.
A crucial factor is whether or not eurozone members can come up with an agreement for greater integration and the bailing out of some of its weaker members. This will certainly be important in calculating the economic forecast for the eurozone, because if these initiatives were to fail, it would mean that the eurozone itself is on the verge of disintegration.
Over the short term, the market would most likely have a positive reaction with any news of greater integration by the eurozone members. However, I seriously doubt that the long-term structural reforms will ensure the health of the eurozone in the very long term. I think we could see a knee-jerk reaction, in which many investors who have been short would cover, but the long-term economic forecast would remain quite dire.
While there is talk of a eurozone banking union, the ultimate goal of a complete fiscal union is still not likely to happen, in my opinion. As well, the declining economic situation in many nations, including extremely high levels of unemployment, certainly clouds my economic forecast for the eurozone in 2013.
In fact, with recent data pointing to the possibility that the weaker eurozone members are beginning to drag down Germany, this might cause extreme disillusionment by its citizens toward helping to bail out the weaker and inefficient members of the eurozone; this sentiment is already present and gaining steam.
This could cause greater tensions in 2013, which ultimately leads to the conclusion that any economic forecast for the eurozone should never be written in ink, since the situation is so fluid that it seems to change on a weekly basis.
American investors should certainly watch out for either a dramatic improvement or a disintegration of the eurozone. Many American companies, not only financial institutions, have a large exposure to the eurozone. Either the eurozone members come to some sort of agreement, which will temporarily push up market prices, or the situation gets far worse and the impact on American companies will certainly be very significant. Only time will tell, but when it comes to politicians, I’m always worried about whose interests they really are supporting.
The post How the Eurozone Could Hurt the American Economy in 2013 appeared first on Investment Contrarians.
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