Eurozone recession likely to last ‘another year’

Portugal's economy is forecast to slide further. Picture: Getty Images
Portugal's economy is forecast to slide further. Picture: Getty Images
Share this article
Have your say

THE eurozone is likely to remain mired in recession for a year longer than previously forecast as the 17-nation bloc suffers the fallout from weak bank lending and record unemployment.

Publishing its winter forecast yesterday, the European Commission (EC) raised particular concerns about Portugal’s economy, which fell sharply in 2012 and is expected to further contract this year.

The eurozone, which generates nearly a fifth of global output, is now forecast to shrink by 0.3 per cent this year. Just late last year, the EC was forecasting 0.1 per cent growth in 2013.

The revised forecast means that the single-currency zone will remain in its second recession since 2009 for a year longer than originally foreseen.

Tight lending conditions for companies and households, job cuts and frozen investment are among the hurdles delaying the recovery.

A number of economic forecasters have trimmed their European growth estimates, after the global recovery showed signs of faltering in the closing months of 2012.

Last month, the International Monetary Fund (IMF) said it expected the eurozone to fall into “mild recession” in 2013, having previously forecast modest growth. The World Bank revised down its global growth forecasts earlier in January.

Not every part of the eurozone is flagging. Germany’s Bundesbank said this week that Europe’s biggest economy would avoid recession by returning to growth in the first quarter, having shrunk by 0.6 per cent in the final three months of 2012.

Marco Buti, the EC’s director-general for economic and monetary affairs, said: “The improved financial market situation contrasts with the absence of credit growth and the weakness of the near-term outlook for economic activity. The labour market… is a serious concern.”

Despite the bleak outlook for this year, the commission sees the eurozone economy expanding by 1.4 per cent in 2014.

The European Central Bank’s (ECB) pledge last year to use whatever measures are necessary to prop up the euro has removed the short-term risk of a break-up of the eurozone and helped underpin a recovery in European stock markets.

Member countries’ borrowing costs have also fallen back from unsustainable levels.

However, the damage from the 2008-9 global financial crisis and the ensuing eurozone debt crisis has been greater than expected on the real economy, with global demand for eurozone exports one of the few saviours in terms of generating growth. Joblessness in the bloc is set to peak at 12.2 per cent, or more than 19 million people, in 2013, the commission warned.

Consumer inflation is forecast by the EC to be 1.8 per cent for 2013, and with such pressures contained, the ECB may feel more comfortable cutting interest rates to below the current 0.75 per cent level.

In a note this week, investment bank JP Morgan said: “A cut in the main refinancing rate is not the most powerful measure the ECB could implement, but it is a step in the right direction.”