Growth will come to a complete halt: Saxo Bank

A Saxo Bank report has painted a grim picture of the global economy with the prediction that growth will come to a complete halt in the fourth quarter of 2010.

In its economic outlook for the fourth quarter of 2010, Saxo Bank, the trading and investment specialist, recognises growing optimism in recent months due to a strong earnings season but the state of the US economy still overshadows these results.

The bank expects final sales to remain weak in the second half of 2010 and into 2011 and the unemployment rate to continue to hover just below 10 per cent in the fourth quarter.

“We expect growth to come to a complete halt in the fourth quarter of 2010 as consumption deleverages, the manufacturing sector will slow down, and investments will be negatively affected by the weak housing market. Unfortunately, the risk of a double dip, within the next few quarters, is substantial in our view," David Karsbol, Saxo Bank's Chief Economist, said.
 
 
Equities rely on the notion that the impressive earnings growth rates, recorded in earlier quarters, can be sustained.  According to the Bank, the trouble is that earnings growth currently comes almost exclusively from one source: margin expansion, and while productivity gains can only take income to a certain level, sales growth must soon step up to the challenge.

"With the S&P 500 currently trading around the same level as it did at the beginning of the  year, and with the lack of investments due to a weak housing market, the ongoing trouble in Southern Europe, and most developed economies, Saxo Bank fears that a cold front will stall, bringing more  challenges and adversity  going into 2011,”  he  said.

The bank predicts that spending at state and local levels remains a downward trend as policymakers scramble to balance their budgets.

Despite the fact that the recession is generally perceived to have ended in the summer of 2009, it is still very much a reality at state and local levels.
"Double dip fears re-emerged over the summer as the deceleration in the US economy progressed as predicted in our 2010 Yearly Outlook.

Saxo Bank expects risk to range trade and its view of the economy dictates a more bearish stance than its range trade call, especially with a looming slowdown in China and continued sovereign default concerns. The analysts are also concerned about the Euro zone. Like the US and Japan, Europe faces a weak private economy, but unlike the former two, cutbacks in the public sector are also on the horizon.

Reining in the deficits is a necessary, healthy process, but its short-term impact on GDP growth will be considerable.

The analysts believe the equity markets are de facto pricing in too rosy a picture of the global economy. Sales are expected to be weak in 2011, trailing the development in nominal GDP, but the corporate sector might still be able to cut some costs. As such, earnings growth is expected to remain flat to marginally positive in 2011 instead of outright negative. Saxo Bank expects a normal earnings growth development from 2012. 

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