UniCredit SpA : Outlook 2012: gradually moving towards a better place

• Worldwide GDP expected to grow by just over 3 per cent and by  0.6 per cent in the Eurozone
• European economy is already stabilizing
• Markets should remain in recovery mode, with ECB liquidity measures helping
• Main concern is possibility of sovereign and  financial crisis  spreading  to the private sector, thus threatening social cohesion
• Global imbalances could threaten the recovery if not effectively tackled  

UniCredit's Research Department, led by Global Chief Economist Erik F. Nielsen, presented today its 2012 Outlook report.

UniCredit expects global GDP growth to ease from about 4.25 per cent in 2011 to just over 3 per cent in 2012. The Eurozone will probably see its growth rate declining from 1.6 per cent to 0.6 per cent. There is likely to have been a trough at the end of 2011, which should be followed by a moderately better performance during 2012. That said, the world is facing very large uncertainties due to the lingering impact and severity of the 2008-09 recession, recent years' unprecedented policy reactions, and remaining global and national imbalances.

UniCredit sees the European economy bottoming out this winter, followed by somewhat better growth back towards 1.5 per cent annualized around end-2012. Fiscal consolidation and continued uncertainty will be a drag on the recovery, and tight monetary conditions in the periphery will further hurt the recovery in these countries.

In the case of Italy, Portugal and Greece, UniCredit's economists expect GDP to contract in 2012. Importantly, private sector balance sheets remain in good condition in most Eurozone countries, including Italy. Exports have already started to recover nicely throughout the Eurozone periphery; a trend expected to continue.

If the assumptions about the GDP path are correct, then the market recovery should continue. The ECB's aggressive move on liquidity, deployed as a first step in December, will help. Spreads should tighten, equity prices should move higher, and as banks enjoy greater access to ECB liquidity in both euros and dollars, their need to sell FX-denominated assets will ease - and with that we see further Euro weakness.

However, for this moderately better outlook to materialize, it is crucial that investors' concerns start to ease. In spite of unprecedented fiscal and structural adjustments throughout the Eurozone periphery, investors remain cautious. They are concerned about the ECB's hesitant stance towards restoring a proper transmission mechanism, which has led to unsustainable differences in monetary conditions across the Eurozone. They are also concerned about uncertainties surrounding possible private sector participation in future debt work-outs. As a result, what is ultimately a sovereign crisis has spread to also become a financial sector crisis, and is starting to threaten the non-financial private sector as well as the social cohesion in some countries.

Meanwhile, uncertainties continue to be rooted in underlying global imbalances, which played a significant role in triggering the crisis in 2008. They are being addressed at a very slow pace, if at all. In the US, where growth broadly matched that of the Eurozone last year, private consumption - in part driven by ongoing fiscal stimulus and lower inflation rates - is likely to fuel somewhat better growth in 2012, but public debt as a share of GDP is moving through 100 per cent, and household balance sheets remain extremely vulnerable. US savings ratios will remain below 4 per cent of income; only one third of that in the Eurozone.

China, which - mathematically - produced more than one third of global growth in 2011, has still not made any significant inroads in its long-term plan to boost domestic demand at the expense of external demand. As a result, the Chinese economy has been slowing during the second half of 2011 due to weaker export markets. Whether the authorities can mastermind another boost to growth, via public investment in infrastructure and housing as well as through state-owned enterprises, remains to be seen.

Milan, January 31 2012

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