In an exclusive interview with CNBC-TV18, Brian Fabbri, Chief Economist, BNP Paribas (North America), speaks about the global markets and gives his outlook going forward.
He says, it looks like India is probably going to be the country that grows the fastest and perhaps has maybe the best, at least in terms of consistency, track record, going forward.
Here is a verbatim transcript of the exclusive interview with Brian Fabbri on CNBC-TV18. Also watch the accompanying video.
Q: We have slew of not so encouraging data come out of the US and we saw the S&P going down all the way to 1,020, do you think we are going to see more such disappointing data, it will not be a double-dip, but just kind of slow data?
A: Certainly, the US is still in a growing mode, the expansion is continuing, in fact it’s broadening, it’s reaching into different areas, but there is no question in my mind that the financial markets have become much more worried about Europe in particular rather than about America. And it’s this disappointment about European economic growth that I think is created a great deal of caution.
We see it in stock prices, we see it in the treasury yields for example. There has been a rush to safety, away from credit risk taking and consequently it’s probably creating more caution on the part of businesses hiring practices, investment practices and maybe even beginning to start to show up in terms of individuals because if there is any secession of hiring then certainly they are going to save money instead of spend it.
Q: Are you saying that the kind of jobs data, retail sales data, all that came in June and to which markets reacted with some kind of scare was more because of American businesses being worried about what might be the European outlook? Would you say the US pace of growth would therefore not flag off too much from here on?
A: The European crisis started to affect US financial markets basically in April and May and by June we began to see economic data reflect what had already been in financial markets. I think the financial market reaction to Europe was immediate and consequently it took a little bit of time before it began to seep into American data.
Yes, I do think American economic growth will slow relative to what we saw in the second half of last year. Some of it has to do quite naturally with the transition of an expansion from a rebound from very low levels to a more sustainable path. But indeed Europe’s crisis has affected stocks and bonds and its effective risk taking and that too will slow things down in America.
Q: How much of a slowdown do you see? Over the last couple of weeks, we have heard couple of voices on double-dip, are you also in that camp or do you think those fears are overdone?
A: I think they are overdone the risk story. I think America goes from having 3% plus growth to having something like 2% plus and I think that is much more consistent with the kind of data flow and the expansion of things. It is not just Europe, it is also the exhaustion of the fiscal stimulus package that took place last year. We have gone through it, we have spent that money, there doesn’t seem to be any new packages being created in Washington. So, therefore, all we have then is monetary stimulus and remember that interest rate is still zero in America, money is free and eventually banks will feel much more comfortable making new loans and consequently that should keep economic growth going. But it’s a 2% growth rather than a 3% plus growth rate.
Q: There is the huge debate and we hear so much written by Paul Krugman about necessity of another fiscal stimulus package, without getting into ideology of where people stand and the package itself, what is your sense? Can growth keep growing, only if there is a further stimulus? Secondly, what will be the downside, if there is such a stimulus? Is there enough investor appetite to buy so many more US treasuries, it seems to be flagging for other government bonds?
A: So that is two parts, the first part, I do think that the economy can continue growing without more fiscal stimulus, but I do think it will be at a much slower pace and maybe this 2% pace stays the pace into the future, which is well below what we have experienced in past business cycle expansion. So, I think we just have to live with it.
As far as political scene is concerned, politicians in America became concerned about US Budget deficits not because of the Budget deficit itself, but because of investors reactions globally to the European situation. And suddenly American politicians woke up and say that maybe there really are limits to how big deficits can become and consequently America is probably not going to because of Congress’ response, reaction to the European situation, probably going to decide not to spend more money. Therefore, the arguments that Paul Krugman are making that you need more money, probably you are going to go on deaf ears.
Now, as far as American investment or investors into America are concerned, keep in mind that what we have seen is this rush to quality or rush at least to safety out of Europe and into America and I do think that continues. So it’s not about how much debt America creates, but rather where else can people invest? For the time being that still is going to be the dominating theme. Some day Europe gets past its current crisis and may become a much more attractive place for investment, but I think that is two-five years from now.
Q: Do you track India because recently we have seen an upward revision from IMF (International Monetary Fund), as far as growth forecast are concerned, what about you?
A: I think the funny part of India is that one they escaped all the problems that the rest of the world faced during the mortgage crisis in America and the subsequent recessions. Clearly, you [India] weren’t really the big exporter to America or to the rest of the West and therefore you did not suffer much from it.
Now, it looks like you [India] are probably going to be the country that grows the fastest and perhaps has maybe the best, at least in terms of consistency, track record, going forward. China ofcourse had been growing faster, but now we know that China is having some internal problems, they need to exercise more constraint on their banks and on their stock market. Consequently, there are some risks to the Chinese growth story.
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