THREE RISKS HEADING INTO 2011

Like the majority of investors these days Wells Fargo is very bullish heading into the end of the year, however, they do see some risks developing as we move into the new year:

“We believe that real GDP growth will slowly strengthen over the course of 2011 in most major economies. Further deleveraging by households should continue to constrain growth in U.S. consumer spending, although the headwinds should become less intense as the year progresses. In Europe, fiscal tightening by many governments should keep overall rates of GDP growth in check next year. In contrast to their counterparts in the developing world, we project that most major central banks will maintain accommodative policy stances well into 2011. We do not foresee the Fed hiking rates until 2012, and most other major central banks likely will be on hold for the foreseeable future as well. Unless the euro area should flirt with outright recession again, which we do not expect, we believe that the European Central Bank will refrain from increasing the size of its modest QE program.

What could go wrong? In our view, there are a few credible downside risks to global GDP growth to keep in mind over the next year or so.

• First, central banks in developing economies could respond to higher inflation by excessive monetary tightening. Although we place a low probability on this eventuality, inflation rates in the developing world bear watching.
• Second, the sovereign debt crisis in the euro area has continued to simmer. Global credit conditions could tighten again if weaker-than-expected economic growth and/or higher-than-expected budget deficits in some affected economies unnerve investors.
• Finally, a “currency war” could turn into an outright trade war, which would be in no country’s interest.

Source: Wells Fargo