Reported by Julia Pastor
What has surprised DWS most about the global economy’s performance over the last three months is its resilience in the face of the closure of the Strait of Hormuz, which Mariano Arenillas, the firm’s country manager for Iberia, attributes to reduced dependence on fossil fuels and the release of reserves. “The markets have learnt to manage geopolitics and the Trump administration,” he explains. The consequence of this blockade for the Eurozone in the second half of the year is a downward revision of growth forecasts to 0.8%–0.9% from 1% at the start of the year. Inflation is set to stand at around 3.1% and the ECB is likely to raise interest rates by a further 25 basis points to 2.5%.
In the US, however, there will be no further rate rises. DWS instead forecasts a trend towards monetary easing to a range of 3%–3.25% as inflation is brought under control. Prices, which currently exceed 4%, will fall back to around 3%. The economy will grow by 2% year-on-year.
In this central macroeconomic scenario, US debt emerges as one of the German asset manager’s greatest concerns. In this case, it is not US household debt, as was the case during the 2008 subprime crisis, but government debt. Whilst household debt accounts for 70 per cent of GDP, government debt stands at around 121 per cent of GDP. Bearing in mind that US GDP stands at $30 Bn, and the yield on 30-year Treasuries is 5.71%, this means that the country has to finance around $1 Bn each year – practically 75% of Spain’s GDP, as Arenillas points out. “How sustainable is this? Very little. We see this in Trump’s obsession with lowering interest rates so he can borrow more cheaply. It is not just the level of debt, but the fact that every year the government spends 6 per cent of its revenue – which is the fiscal deficit – and this is currently much higher than that of many developed countries,” explains the expert.
At present, with debt-to-GDP at around 121 per cent, the US would have to pay 43 basis points per million dollars to finance itself in the event of a default, “something that is not going to happen”. “In reality, it’s very little. We as individuals are charged 8 per cent on our personal loans. 8 per cent is 800 basis points, so 43 dollars is 0.4 per cent. The cause for concern for the markets is that the year began at around 30 basis points,” argues Mariano Arenillas.
Compared with the US, Spain’s debt-to-GDP ratio also stands at very high levels of 101.6 per cent, but the situation is more favourable. “As this indicator is a ratio and Spain is growing at 2.5 per cent, your debt-to-GDP ratio falls relative to other countries, and also because you have a lower fiscal deficit.”
