The US economy is starting to look more optimistic despite fiscal uncertainties while the eurozone continues to stay pessimistic, according to William Lee, managing director at Citi.
He said that although recovery has been “suppressed” in the US, there are some signs of recovery as house prices have started to recover and corporate profits and balance sheets are in a better position.
Lee pointed out that discoveries of natural gas have lowered the country’s energy costs far below that of the euro area and Japan since 2008.
“In the medium term with lower energy prices the US will have a better advantage over its competitors in Europe and Japan, similar to how technology gave the US an ace over other countries.”
He said the fiscal cliff has been avoided but the economy isn’t out of the woods yet: “Instead of sudden death from the fiscal cliff we’re now left with a lingering death.”
According to Lee, none of the proposals in the US address the issues that are pushing the country into a non-sustainable situation. He added: “The debt ceiling won’t really kick in until August and that’s when we will start to see some action from policymakers.”
“We won’t see a lot of certainty over fiscal policy for some time which will have a restraint on growth but nevertheless the deleveraging, easing of the ‘wealth effect’ and boost from energy prices will start to push apart the debt-to-GDP ratio that separates the US from the euro area. We are getting more optimistic about where the US is heading especially in the second half of this year when these fiscal problems might start to get solved a bit better.”
While the eurozone’s sovereign debt problems and banking crisis have been well-covered in the mainstream press, Lee said one factor that tends to be missed out is the “external imbalances crisis” as a result of the economic divergence and wide range of competitiveness among the eurozone countries.
“The external imbalance problem is like a cancer that is tearing apart the very fabric of the euro area - this is what all of us economists worry about.”
Lee was speaking at the PASLA/RMA Conference on Asian Securities Lending in Hong Kong.