S&P, like most economic forecast firms, like to hedge its bets. The credit rating agency believe that the eurozone will have a mild recession at the start of this year, and begin to emerge in the second half. That will be followed by halting growth. One has to assume no catastrophic change in sovereign debt or a tremendous negative impact of austerity on growth. Either could happen and happen easily.
The eurozone should gradually climb out of its mild recession in the second half of this year and into 2013, in Standard & Poor’s opinion. We think core countries will lead the way, with other member countries delivering diverging performances. Under our baseline forecast for 2012-2013, which we updated at the end of 2011, we project flat GDP for the eurozone as a whole in 2012 and 1% growth in 2013.
We acknowledge, however, that risks of a steeper downturn this year have risen. We currently assign a 60% probability to our baseline forecast, versus 40% for our alternative forecast of a true double dip, which would have a particularly adverse impact in countries like Spain, Portugal, and Italy.
We believe three main factors will determine the depth of the eurozone’s downturn:
How demand from emerging markets holds up in the coming quarters;
How European consumers react to renewed uncertainties, such as rising unemployment and concerns about the sovereign debt crisis; and
How European governments and especially the European Central Bank (ECB) rekindle investor confidence in capital markets in the next few quarters.
Still, we think the scale continues to tilt in favor of a mild recession and a gradual return to growth, taking into account potential growth in emerging market demand, resilient consumer demand in the core countries, and somewhat restored investor confidence.
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