Recession now, stagnation in 2013 for euro zone

LONDON Thu Nov 15, 2012 4:39pm GMT

LONDON (Reuters) - The euro zone's new recession will extend until the end of the year and 2013 promises little better than stagnation, a Reuters poll of more than 70 economists showed on Thursday.

Conducted before Thursday's data that showed the euro zone returned to recession in the third quarter, the survey showed only meager economic growth awaits the region over the coming year.

For the first time, economists expect the current recession to spill over into this quarter as well.

The consensus was for a 2012 contraction of 0.5 percent and just a 0.1 percent growth next year.

With more austerity on the way across the continent, which sparked a series of general strikes across southern Europe on Wednesday, Europe's leaders have left themselves few options to spur economic growth next year.

"Today's GDP figures clearly demonstrate that the euro zone economy as a whole is in desperate need of macroeconomic stimulus," said Martin Van Vliet, senior economist at ING.

"With policymakers seemingly reluctant to engineer a coordinated pull-back from fiscal austerity, more monetary stimulus and a weaker currency is likely to be needed to put the euro zone back on a path of sustained growth."

Even as recently as August, economists thought the euro zone might eke out growth of 0.5 percent next year, but business and sentiment surveys show the downturn has since gathered pace.

Respondents have cut their growth outlook to an average of just 0.1 percent in 2013 from 0.3 percent in the Reuters October poll, and kept their view that the economy will finish this year having declined 0.5 percent.

While the recessions in Spain and Italy extended into the fourth quarter, there were signs more resilient northern European economies are feeling the strain too. In particular, the Netherlands, which posted a dire 1.1 percent decline in gross domestic product in the quarter.

The next major question for the euro zone remains whether Spain's government will seek outside help for its funding.

SPAIN TO SEEK AID

In common with previous polls, a firm majority of analysts said Spain will do so, whether in the form of a credit line, bond purchases from the ECB, or a full sovereign bailout.

But there was debate over the timing.

From the 28 analysts who answered the question, eight thought this would happen before the end of this year, nine thought in the first quarter of 2013, and eight said later than that. Only three said Spain would not seek help.

"With (Spain) running out of domestic fixes to calm apprehensive bond markets in the current recessionary climate, we believe a precautionary credit line from the ESM and the ensuing ECB bond buying will be critical 'to take the top off' the crisis," said Raj Badiani, economist at IHS Global Insight.

He penciled in March as the most likely time for Spain to request assistance.

Economists are divided over whether the European Central Bank will cut its main refinancing interest rate to a new record low 0.5 percent from 0.75 percent presently.

While the median of forecasts points to a rate cut coming in the first quarter next year, respondents were split down the middle - 40 saying there will be one, 39 saying not.

Many economists believe another rate cut would have only a marginal effect on economic growth, but at least rising consumer prices would be no obstacle to cutting rates, the poll showed.

Inflation will sag to just below the ECB's target ceiling of 2 percent in the second quarter of this year, from 2.5 percent in October. (Analysis by Deepti Govind and Ashrith Doddi)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.