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Eurozone recession likely to continue, but milder than expected

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05/07/2012
The euro area economy is unlikely to improve soon but the recession should be milder than the 2008 slump, according to Legal & General Investment Management.

In a recent briefing, LGIM economist Hetal Mehta explained that growth in the euro area will remain weak but a severe recession in the region as a whole is unlikely.

Mehta said: “The euro area debt crisis is undoubtedly a major concern. Fortunately, global economic conditions are much better than during the ‘perfect storm’ that started in 2008.”

“2008 was notable for high and rising interest rates, tight credit conditions, oil at US$150 and collapsing world trade. Those conditions just don’t exist today.”

LGIM expects that the Eurozone will experience a mild recession in this year, and for growth to be near zero in 2013, based on a scenario whereby policymakers manage to keep Greece in the euro.

The main risk is forecasted to be a possible Greek exit, which would have a large, negative impact on the region as a whole.

LGIM’s research shows that although the peripheral Euro area countries all have high government debt levels, there are significant differences between them. This has implications for their respective paths back to sustainable debt levels.

Mehta continued: “Spain is often spoken of as the next Greece, but this isn’t the case. While Spain’s public debt is rising as the economy undergoes a recession, at least the private sector is no longer borrowing.”

“And by next year we expect exports to exceed imports and external interest payments, which effectively means Spain becomes self-financing. Greece is a long way off achieving this.”.

LGIM predicts that Germany will remain the best-performing economy in the region, with France seeing some, albeit weak, growth as it has yet to implement any significant measures aimed at balancing its budget and cutting debt.

Mehta added: “For the short term at least, government debt levels will rise almost without exception across the euro area and the UK. We expect this to lead to further credit rating downgrades.”

“If euro area policymakers can keep Greece in the single currency, our ‘muddle-through’ scenario of sluggish growth and painful economic adjustment is likely, but the risks are heavily skewed to the downside.”

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