A higher 2012 gross domestic product forecast prompted research firm Capital Economics to say the U.S. economy is heading down a safer path than its European counterpart.
Assisted by improved growth predictions and well-capitalized banks, Andrew Kenningham, senior global economist for Capital Economics, believes the U.S. can withstand a financial downturn in Europe.
This estimation is a stark contrast from the days when developed economies were generally subjected to shocks and economic fates in similar economies.
“In normal circumstances, business cycles in the major economies are closely correlated because they are driven by common factors such as oil shocks or credit bubbles,” Kenningham’s report said. “Monetary policy cycles too tend to move in tandem, as central banks respond to changes in global conditions.”
But this time, Europe is on a different, and perhaps less stable, path than the U.S.
While U.S. GDP growth estimates have improved, the euro-zone’s GDP is expected to contract by 1% this year and 2.5% in 2012, according to the research firm. The region’s sovereign debt crisis also is far from over, creating layers of multiple risk. Meanwhile, U.S. GDP could grow as much as 2% this year and another 2.5% in 2013, Capital Economics said.
U.S. exposure to Europe’s debt troubles also is limited.
“We estimate that even if they had to write off all their exposure to the peripheral euro-zone, US banks’ aggregate tier one capital ratio would only fall to 10%,” Kenningham said.
Both economies will be impacted with fiscal squeezes in the coming years, doubled with the fact that expansionary monetary policies are about tapped out on both sides of the Atlantic.
Still, the American economy is looking more stable to Kenningham.
“Trade links between the U.S. and the euro-zone are low. And the stress tests published yesterday confirm that US banks are well capitalized,” he wrote.