Taps Coogan – January 2nd, 2022

Daniel Lacalle, Chief Economist at Tressis Gestión and author of several books including ‘Freedom or Equality,’ recently spoke with IG to share his outlook for 2022. The punchline is that he believes that economic growth estimates, particularly in the Eurozone, are overestimating what the carryforward of elevated growth levels. While he is careful to note that he is not forecasting a recession in 2022, he expects that a return to more normal growth and multipliers which would mean about 0% real GDP growth for the Eurozone.

 

Daniel Lacalle on growth estimates in the Eurozone:

“It’s almost impossible to achieve the level of fiscal multipliers that international bodies are assuming to get to those levels of growth. I think also that the risk of inflation is very important. Inflation, even if it moderates in 2022, is a burden on consumption, a burden on investment, and a burden on growth… After a very indebted recovery and a very weak recovery in the Eurozone, it is virtually impossible for these countries, due to the demographic effect and due to the indebtedness, and also because of the productivity and the risk of inflation, to reach those estimates. However, that does not mean recession… We’re going into normality… Prior to the Covid-19… the fourth quarter of 2019, France was growing 0%, Italy was growing 0%, Germany was not growing either. So, we need to understand that the factors that were driving the slowdown of the Eurozone prior to Covid-19 are where we are recovering into… low growth, high debt, and low productivity…”

On base effects, transitory inflation, and stagflation:

“Stagflation is an important risk that we should not rule out… The problem that I find in the message of temporary inflation is that it comes from international bodies, central banks, and analysts that started the year (2021) by saying that there was absolutely no risk on inflation, actually that there was risk of disinflation. Then they said that inflationary pressures were due to the base effect. When the base effect was gone, they said it was going to be largely temporary. Now they say it has some risk of being more permanent…”

On the ECB:

“I think that the ECB is focusing its policy too much on a level of bond yields for sovereign issues that is absolutely disproportionately low for the reality of the economy. The ECB… is caught between a rock and a hard place. On the one hand inflation is soaring, it’s hurting economies like Spain and Germany… while at the same time, if it stops the purchases, or at least reduces the rate, the impact on sovereign issuers is going to be very large, even from a very modest increase in bond yields. So no government in the Eurozone right now is able to tolerate an increase in bond yields… The ECB doesn’t have tools to address inflation…”

On global growth:

“We should expect China growing significantly less than anticipated because real-estate situation is a lot more important than what many are assuming… I think that the US is going to slow down its growth but reach the levels of employed that it had prior to the pandemic by the end of 2022. Labor participation is a big problem in developed economies because there are a significant number of people who are simply unable to come back to work… I think that the biggest risks for 2022 come from China and the emerging economies where the fiscal and monetary imbalances are very aggressive and can deliver a much steeper decline in the improvement of the economy and I think that the Eurozone is on the path to its low levels of growth, but the United States is likely deliver a rate of growth and employment that is probably stronger than its peers… Central bank policy has to remain extremely accommodative. I don’t think we will see the rate hikes that have been announced…”

There is more the interview, so enjoy it above.