March 15, 2012

Euro Economy Seen as Shrinking More Than Expected

Countries attacking budget deficits will reduce GDP, says firm

Ernst & Young predicted that the euro zone will see its economy contract more than it had originally expected as countries tackle budget deficits.

Bloomberg reported late Wednesday that the company had originally forecast a contraction of 0.1% for the region in December. However, in the spring forecast for the euro zone released Wednesday, that outlook had changed. A Romania Insider article cited Mark Otty, Ernst & Young area managing partner, Europe, Middle East, India and Africa, saying in the report, “Overall GDP is now forecast to fall 0.5% as opposed to our earlier forecast of 0.1% with few countries likely to escape falling output in 2012.”

The difficulty of predicting with any certainty, given so many financial variables, resulted in the report titled “Difficult scenarios, difficult to assess.” The effects of widespread austerity programs are seen as restricting growth throughout most of the region, according to Otty, who was quoted saying, “We forecast that collectively these government cuts have dampened GDP growth by over 1% for this year and next, and recognize that they will delay economic recovery.”

While a bright spot is seen as the implementation of necessary reforms, other assessments are not so cheery. As public and private debt are refinanced and additional jobs fall to cuts in budgets, “challenging” conditions will result in some countries losing substantial economic ground.

Critical to the recovery process, according to the report, is the support of the European Central Bank (ECB). “[W]ithout this,” the report says, “there is a risk of a series of disorderly defaults among the peripheral countries that would threaten the future of the euro zone.” While the bloc may be able to weather a possible departure by Greece, if other debt-raddled countries like Portugal and Spain follow, it will “unleash” a cascade of economic catastrophes that would result in disaster, with “the Eurozone … plunged into a deep, multi-year recession.”

While foreseeing a return to growth, if limited, in 2013, the report also warns that “there is a risk that credit constraints and fiscal austerity are more severe and protracted than we currently envisage; in this scenario, the euro zone would experience a deeper recession.”

 

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