Stage Set For Budget Battles In Developed World

Natixis February Update.  Forecasting 2% growth for the US, 1% for the UK and Japan, and nothing at all for Europe, Natixis disagrees that world trade will be able to invigorate economic activity in the second half of the year.  There are 3 main hurdles for the US economy in the first half: the sequester, Continuing Resolution and debt ceiling.  All 3 of these will be dealt with at the very last minute.  The Continuing Resolution and debt ceiling must be dealt with or the US economy could see another downgrade, while the sequester is already priced in (they use lower multiples on government funded companes like healthcare and defense for example).  The sequester will take 0.5% off GDP, but looking at the actual BEA GDP report, government spending already took off 67bps in 2011 and 34bps in 2012.

The key in their European outlooks revolves around fiscal tightening in a recession, if that has a disproportionate impact on growth, and if world trade can help spur demand in the region.  They believe that the steep austerity measures, particularly in France, will lead to a deeper recession, while world trade will do very little.