BusinessDesk: "This is not a euro crisis, it is a debt crisis in some euro states": Schaeuble

By Margreet Dietz

It's going to be a tough start to the year, most agree.

The latest data confirmed that European economies, including the region's largest, remain firmly in the clutches of a fiscal crisis. Germany’s purchasing managers index climbed to 48.4 last month, a welcome gain though it did little to alter the expectations of tough months ahead.

"These numbers are consistent with our view that it's going to be a normal recession," Dirk Schumacher, senior European economist at Goldman Sachs in Frankfurt, told Reuters. "Still painful, no doubt about that, but there's no indication that it's going to look like anything like around the end of 2008, so far."

French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet early next week to discuss the next step in rewriting the EU's fiscal rules, Sarkozy's office announced overnight without providing more detail.

With Europe's troubles, the strength of the US economy may be more dependent on that of China's, the world's second-largest. A manufacturing gauge for China increased to 50.3 in December.

"China is the 800-pound gorilla in the room and is probably the most important country to watch in terms of their contribution to global growth," Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut, told Reuters.

Spending by the American consumer, key to the nation's growth, has been sluggish at best. Over the past three and half years, growth in US consumer spending has averaged 0.2 percent adjusted for inflation, the worst in the post-World War II period, according to Morgan Stanley. So much for all the enthusiastic holiday shopping.

Signs of improvement in the labour market provide glimmers of hope. The government's non-farm payrolls report is expected to show a December gain of 150,000 jobs, compared with an increase of 120,000 jobs in November, according to economists polled by Reuters.

Investors will also eye the latest data on American factory output, released on Tuesday and expected to show signs of improvement.

In the year ahead, US stocks may advance because of their relatively cheap valuations and the resilience of the American economy. The S&P 500 is expected to rise 6 percent by the end of 2012, according to the most recent poll of Wall Street strategists, Reuters said.

US and UK markets were closed today for the New Year's holiday. Europe's Stoxx 600 was up 1.1 percent while Germany’s Dax Index rose 3 percent.

Last year was a challenging one, without a doubt. The S&P 500 ended 2011 at nearly the same point it started, slipping 0.003 percent and the closest it has come to unchanged since 1947, Reuters reported, citing Standard & Poor's.

The Dow Jones Industrial Average closed the year with a 5.5 percent advance, while the Nasdaq Composite Index gave up 1.8 percent.

The worries that plagued 2011 won't go away any time soon.

"There is a growing realisation that the global economy is in jeopardy," Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville, told Reuters. "There is uncertainty in every corner of the world."

Investors will also eye the latest debt auctions in Europe, where France plans to sell 16.9 billion euros of debt this week.

Sunday marked the 10th anniversary on Sunday of the introduction of euro notes and coins, and policy makers pointed out that the euro zone's crisis wasn't due to the single currency.

"This is not a euro crisis, it is a debt crisis in some euro states," German Finance Minister Wolfgang Schaeuble told German newspaper Bild in an interview to be published in Monday's edition of the paper, Reuters reported.

Yet, a BBC poll of 34 independent economists who provide forecasts for the Bank of England found that one fifth expect the euro zone to break up in the next year.

"Europe is going to face a deep recession in the first half of next year," Gerard Lyons, the chief economist at Standard Chartered bank, told Reuters. "It's in terrible shape. Fundamentals are not good, policy stance is terrible and confidence has been shot to pieces."

As a result of the economic uncertainty, commodities struggled in 2011. Oil and gold still managed to finish the year ahead, helped by the political chaos across the Middle East.

Investors will keep a close eye on the tensions between Iran and the US over Tehran's threats to close the Strait of Hormuz, a key passage for more than a third of the world's oil. Iran has in recent days successfully tested new long range missiles and says it has manufactured a nuclear fuel rod.

As for gold, there's further strength ahead.

"Crucially though, despite recent heavy losses, we do not believe that the gold bull market is over. We are still positive towards the gold price in 2012 and 2013," BNP Paribas analyst Anne-Laure Tremblay told Reuters.

(BusinessDesk)