Both emerging markets and the U.S. appear poised to recover from last year’s economic stumbles, but problems persist for Europe, according to the head of global financial giant UBS.
The continent is predicted to only achieve a slow rebound, Axel Weber, chairman of the Swiss investment bank, told CNBC’s Joumanna Bercetche in Washington D.C. on Thursday.
“We’re a bit skeptical about the ability of Europe to use stimulus to come out of this,” he said. “I think there is some downside risk in Europe and you have to acknowledge that. So, whilst I do have the main outlook to be a sort of L-shaped recovery, stabilization at a lower level, growth below potential, I don’t have the main scenario of a recession.”
The International Monetary Fund recently downgraded growth in the euro zone. It now expects the bloc to grow at 1.3 percent in 2019 — lower than its forecast had been six months ago.
In many European countries, including Italy and France, there’s very little room for governments to use fiscal policy to stimulate the economy, Weber said. That’s because their fiscal deficits are near the upper limit of the 3 percent of GDP that the European Central Bank allows. Only Germany has room for additional fiscal measures, but Berlin will only use it to boost the domestic economy, the UBS chief said.
On the monetary policy front, the ECB has pumped trillions of euros into the economy over the past few years to boost inflation and promote growth. Earlier this week, the ECB held interest rates steady.
“What you have to ask yourself is: After years of quantitative easing, is adding more of the same really going to have the same impact on the economy that it did have when they started this? My answer to that is, probably not,” Weber said.
Europe’s challenges, according to the UBS chief, go beyond the effectiveness of fiscal and monetary policies to boost growth. He pointed out three areas: First, European infrastructure and technology developments lag behind the U.S. and China.
“It needs to improve, and therefore needs investment into infrastructure, into digital economy, into 5G technology in order to catch up. They need to catch up fast and therefore they need to start investing now,” he said.
As Beijing and Washington inch closer to a trade deal, U.S. President Donald Trump recently took a swipe at the European Union. On Twitter, he called the EU a “brutal trading partner with the United States,” and declared that “will change.”
Too bad that the European Union is being so tough on the United Kingdom and Brexit. The E.U. is likewise a brutal trading partner with the United States, which will change. Sometimes in life you have to let people breathe before it all comes back to bite you!
— Donald J. Trump (@realDonaldTrump) April 11, 2019
Weber said Trump’s shift in focus to Europe may invite renewed debate on trade relations.
“That all will not help the recovery in Europe because, as we have seen, if there are trade tensions, there’s a higher uncertainty. It impacts negatively on investment and consumption and, therefore, it drags out any possible recover,” he said.
Brexit is also set to prolong uncertainty in Europe.
While it presently looks unlikely that the U.K. will leave the EU without a deal in place (a so-called hard Brexit), the road ahead remains unclear, according to Weber. Brexit, he said, is still characterized by a huge amount of uncertainty on investment decisions, trade and location decisions.
Earlier this week, EU leaders and the U.K. government agreed to a ‘flexible extension” of the Brexit deadline until Oct. 31. The U.K. was initially meant to leave the bloc on March 29 but was granted an extension to April 12 while the British Parliament failed to agree on any exit deal.
“So, this uncertainty is weighing down on European growth and it cannot be resolved by monetary or fiscal policy,” Weber said.
Author: Saheli Roy Choudhury