Soft patch, not recession, says MFS’ Swanson

Investors watching the world economy slow are locked into a belief that they are facing a global recession, when actually it is simply a “soft patch”, says James Swanson, the chief investment strategist of Boston-based asset manager MFS.

He acknowledges that world economic growth, led by Europe, is slowing, and emerging markets are also now experiencing a decline.

“But before we get too overwhelmed by gloom and doom, let’s break it down,” said Swanson in a mid-year strategy report.

“Nothing has really changed in Europe. The eurozone countries, with the exception of Germany, are in recession. However, the slowdown is not near the magnitude that we saw in 2008 and 2009.” 

He said the crisis in peripheral Europe has been contained by the European Central Bank and the “as-yet-unspoken will” of the German government.

“Let me explain what I mean by this,” he added. “Germany is a very large exporting country and earns 50% of its gross domestic product from its exports. Its export strength is inextricably tied to the fact that the euro is so weak. That weak currency makes its products cheaper for customers abroad.”

“So it is in Germany’s interest to keep the European Monetary Union together and to prevent the spread of a bank crisis. And that is how I expect the eurozone crisis will work itself out.”

He said the “defer, demur, delay” tactics of last summer as the crisis developed, can be expected again as policymakers come up with similar “remedies”.

“When I say remedies, I mean what has come to be known as the ‘kick the can down the road’ approach and not a real solution, which would involve a structural reform of the labour market.”

Meanwhile, emerging markets are merely seeing the delayed effect of tightening in monetary policy. A subsequent reversal should feed through later in the year.

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