A shining example of "the chicken of the egg" type of analysis has emerged courtesy of Goldman's FX and European economic teams. As we disclosed first a few days ago, the Goldman FX guys raised their 12 month EURUSD forecast from $1.38 to $1.55. Obviously, Erik Nielsen economist group has now decided to cut Europe GDPs across the board, with only Italy and France getting hit in 2010, and pretty much everyone in 2011: total projected Europe GDP has now declined from 2.2% to 1.8% in 2011. Of course, this would mean immediately that the EUR currency should decline in the future, as this projection is realized, resulting in GDP growth again. Will the Goldman FX team (which incidentally once again top ticker the pair with sublime perfection) then adjust its EURUSD target lower taking account to weaker GDP projection, only to be followed by the economists raising their GDP, and so far to infinity... Catch 22?
From the Goldman report:
As expected, this week’s ECB meeting didn’t bring much in the way of fresh news. While exchange rate developments are likely to be the topic at this weekend’s IMF meetings, Trichet confined himself to consensual statements. With regard to the ECB’s exit strategy, it seems that an end to the full allotment policy remains in sight in early 2011, at least for the longer-term operations if not for the (more important) weekly ones.
Our new FX forecasts were published earlier this week, encompassing a further weakening of the Dollar and a trade-weighted Euro appreciation relative to our previous forecast of almost 4%. In line with these changes— and weaker growth in France due to more aggressive fiscal tightening—we have lowered our Euro-zone 2011 GDP forecast to 1.8% from 2.2%, which still leaves us comfortably above consensus. Details are provided in our first focus, together with a reassessment of the situation in Sweden, Norway and Switzerland. Concomitantly, we have also delayed our first ECB rate hike to 2011Q3 from 2011Q2, highlighting four risks to our new central scenario: FX developments, fiscal consolidation, financial sector deleveraging, and the risk of a credit event in the Euro-zone periphery.
Our second focus briefly comments on France’s draft 2011 Budget Law, unveiled last week. It included a lower than initially announced 2010 deficit (7.7% of GDP instead of 8%), and an ambitious 6% target for 2011. As the 2011 consolidation objective looks broadly credible, we have adjusted our 2011 real GDP growth forecast for France from 2.5% to 2.1%. In parallel, the pensions reform is giving rise to social discontent that will need to be monitored closely over the coming weeks.
We remain cautious about fiscal objectives for 2012 and beyond.
Does this mean, Jim O'Neill, that little by little the entire "our BRIC savior" theme, as all surging BRIC currencies slam their own respective economies, will also be destroyed once again.
Full report pdf link.