European Recession Likely: Ernst & Young, ECB President Draghi

E&Y also says euro breakup still possible, despite austerity measures being taken

In a report released in London on Thursday, Ernst & Young said that a recession for the eurozone is still a likely possibility, and that the latest plan devised by eurozone leaders may not be enough to avoid the breakup of the joint currency. At the same time, European Central Bank President Mario Draghi seemed to confirm at least the first part of E&Y’s gloomy forecast, saying that the euro region might not be able to avoid a recession because of various governments’ austerity measures.

Bloomberg reported that Draghi, in a speech in Berlin on Thursday, said, “The unavoidable short-term contraction may be mitigated by the return of confidence. But in the medium term, sustainable growth can be achieved only by undertaking deep structural reforms that have been procrastinated for too long.”

E&Y said in its report that the economy of the 17 euro zone countries will most likely contract in this quarter and the one following, and grow only minimally in 2012. The company forecast an expansion of just 0.1%. Its report follows Wednesdays news that industrial production fell 0.1% in October, following a 2% decrease in September.

London-based Markit Economics said Thursday that manufacturing and services also decreased in December, for a fourth straight month. Markit’s composite index of both industries did rise just a bit, however, to 47.9 from 47 in November. An index number below 50 is an indicator of contraction. In a separate report, employment showed a drop of 0.1% in Q3—the first decline in nearly two years.

According to E&Y, euro-region expansion is likely to begin accelerating at the end of 2012; the company predicts growth of between 1.5%–2% from 2013 on. However, that is not sufficient to cause unemployment to fall below 10% till 2015. The company also cited “ongoing doubts” regarding some countries’ ability to implement reforms and a resultant need for the European Central Bank (ECB) to keep buying government bonds.

Marie Diron, an economist at Oxford Economics and an advisor on the report, was quoted saying, “The latest developments in Greece, Italy and Spain and the European agreement lower the risk of a breakup of the euro zone. This risk remains, however, especially since in 2012 very large amounts of sovereign debt require refinancing which could cause tensions.”

She added, “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 eurozone—are to be avoided.”

S&P’s Sam Stovall also sees the likelihood of a European recession in 2012; see previous article on AdvisorOne on S&P Capital IQ’s 2012 forecast for the markets and economy.

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