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| Economy |
| Euro zone faces recession in winter |
| 2011-12-16 |
| JEDDAH: The euro zone is facing a "bleak" winter, according to audit firm Ernst & Young says. A "mild" recession is likely in the first half of next year, leading to economic growth of just 0.1 percent for the whole of 2012, it predicted. Ernst & Young also said unemployment in the euro zone was unlikely to fall below 10 percent until 2015. The prospect of a mild recession in the euro zone in the first half of 2012 is now looking increasingly likely according to Ernst & Young’s Eurozone Winter Forecast (EEF). Despite the reforms announced on December 9, the details on how the agreement will be enforced remain unclear ensuring that volatility is likely to remain high in the near future, dampening growth prospects for the next six months at least. However, assuming that the December agreement is implemented, the forecast predicts weak growth in the euro zone should resume by the end of 2012. The forecast suggests a mere 0.1 percent GDP improvement in 2012, rising to 1.5 percent — 2 percent in 2013-15. Marie Diron, senior economic adviser to the Ernst & Young euro zone Forecast, says: “The reforms agreed at the summit on 9 December were a step in the right direction and the response seems to have been mildly positive. Yet investors remain very concerned about the commitment and ability of euro zone governments to implement reforms quickly. Although this slow down is not currently comparable to the one experienced in 2008 there are still major worries regarding bank liquidity issues and unemployment for 2012.” Mark Otty, Ernst & Young Area managing partner for Europe, Middle East, India and Africa, says: “The uncertainties hanging over the euro zone can only continue to dampen the enthusiasm for European companies to make long term investment and recruitment decisions. Fundamentally, the real challenge for Europe and the ‘advanced economies’ is growth and whether mature economies can find ways to grow above their historical trend to pay off their debt and learn to live within their means going forward.” The EEF welcomes the recent decisions by the European Central Bank (ECB) to reverse its premature interest rate rises of earlier in 2011. It is likely that further easing will be required accompanied by more measures to supply liquidity to banks. In addition, ongoing doubts about the ability of some countries to implement necessary reforms will mean that the ECB will need to keep buying government bonds. Many commentators including the EEF believe that a strong commitment by governments about fiscal reforms could allow the ECB to step up its bond purchase program. Although government bond yields in the euro zone have come down recently they remain high and very unpredictable. Since reforms to the fiscal and economic structures take time, the ECB could well play a key role in the near term in ensuring that bond yields do not reach or stay at unsustainable levels. As Diron explains, “With bond markets very volatile, weak growth prospects and high borrowing requirements in 2012, the ECB is likely to have to consider acting as a lender of last resort if even deeper problems – perhaps even a split in the euro zone — are to be avoided.” Unemployment has been rising fast in some euro zone countries since 2008 particularly in the periphery, but the EEF believes there is a strong possibility of a worsening situation spreading to some of the core. Given the outlook, the jobless total will remain high for a lengthy period — EEF do not expect the unemployment rate in the euro zone to fall below 10 percent until 2015. Banking sector liquidity is another major concern across the euro zone. Bank lending in the euro zone remains tight, as banks restructure their balance sheets and reduce exposure to riskier sectors and countries. The ECB lending survey for Q4 2011 showed that lending standards tightened again, with surveys for individual countries suggesting tighter conditions throughout the euro zone. Among the key factors accounting for this are reduced access to capital markets and banks’ worsening perceptions of the general economic outlook. These lending figures suggest an increasingly adverse impact on business investment and companies’ capacity to raise production heading into 2012. The costs of a break-up of the Eurozone would undoubtedly be very high and have a long-lasting impact on the whole of Europe and the world economy. As a result, EEF believes that the authorities in the leading countries will strive to hold the single currency together. It seems likely that the cost of the ECB acting as a lender of last resort would be less than the medium-term costs of a break-up. |
| Posted by:Steve White |