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EFIC Economic Outlook , February 2012

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In the last outlook, the Eurozone was expected to experience negative financial turns and the threat of knock on effects for the rest of the world were probable, however a lot has changed over the past 3 months.

The outlook has since improved and some notable changes were found:

  • US economy strengthened
  • Big Central banks have eased monetary policies
  • Eurozone crisis has since settled down
In the future several risks are still there noticeable and even if none eventuate, the world economy is still likely to experience relatively small growth. Progress towards a second financial rescue package for Greece is underway.

The European Central Bank has expanded its long-term refinancing operations, lending unlimited sums of 3year, 1% money to qualifying Eurozone banks. This has in turn driven down GOPSI sovereign bond yield for Greece, Ireland, Portugal, Spain and Italy.

Six main concerns at present:

  • The US, UK, Japan and Eurozone are still traveling at a 'stalling speed' and are therefore prone to shocks.

  • Monetary policy is not gaining much traction and in turn the Central banks are now pumping out 'base money' however most banks are still reluctant to lend and for businesses and households to borrow.

  • The Eurozone crisis is still in a fragile state and it is more than likely that a deal between Athens and bondholders will prevent a default on €14.4 billion  in debt coming on the 20th March. However, bailout funds with' 'strings attached' in the form of strict measures that Athens must fulfill

  • Emerging markets may struggle to decouple from a North Atlantic downturn as successfully as after the Lehman bankruptcy, as a result of their previous spending on monetary and fiscal policy to combat earlier downturns
  • China could potentially suffer from a home-grown crisis as its unbalanced growth reaches an unsustainable stage
  • Ongoing conflict with Iran increases and in turn must make us more alert to oil price shocks and military conflict
It is important to remain aware of potential downsides and tail risks associated with this years forecasted weak-growth

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