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After Euro zone Q3 2012 contracts, KFH expects further decline  Join our daily free Newsletter

MENAFN - Kuwait News Agency (KUNA) - 22/11/2012

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(MENAFN - Kuwait News Agency (KUNA)) After witnessing negative growth during three consecutive quarters of 2012, a report by KFH-Research expected that the Euro zone economy is heading for a further decline and a recession.

The latest recession will make it challenging to control financial statuses in the Euro zone, as the total GDP will shrink by 0.4% in 2012, added the report issued within a statement.

However, there are medium term expectations that the Euro zone economy will recover gradually; but the momentum of the recovery will be less due to some tensions in the sovereign debts markets in some Euro areas, not to mention the growing impact of high unemployment rates on the momentum for growth.

The report noted that Germany and France remain main growth catalysts in the Euro region, but their improved performance in Q3 remains humble.
In line with our expectations, the Euro-zone economy slipped into a technical recession in the third quarter of 2012, marking a second recession in four years as governments imposed tougher budget cuts and policymakers struggled to contain the debt crisis, said the statement.

According to the flash estimate by the European Union's statistics office, GDP in the 17-nation economic region contracted by 0.1% q-o-q during the quarter, following a 0.2% q-o-q decline in 2Q12.

In terms of countries, Germany and France remained the primary engines for growth in the Euro-zone, growing by 0.2% q-o-q each during the quarter. Although the latter recorded a rebound in 3Q12 from -0.1% q-o-q in the previous quarter, the former slowed in the same quarter after growing by 0.3% q-o-q in 2Q12.

The decomposition of German growth will only be released at the end of the week but according to the press statement of the German statistical office and available monthly data, consumption and net exports were likely to be the main growth drivers.

Meanwhile, Italy and Spain contracted by 0.2% and 0.3% q-o-q respectively during the quarter, marking the fifth consecutive contraction, from the corresponding rates of -0.7% and -0.4% q-o-q, while Netherlands shrunk by 1.1% q-o-q, on account of uncertainty over the tax treatment of mortgage interest which has hit the Dutch housing market and consumer spending.

Similarly, the Greek economy contracted for a 17th straight quarter and the Portuguese economy completed its second year in recession, amid rising unemployment and fiscal austerity. By the end of this year, Greece's GDP will have dropped by a fifth since it entered its recession in 2008.

In our view, the latest recession in the Euro-zone will ultimately make it more difficult for further fiscal consolidation. Indeed, falling GDP combined with rising unemployment drain government coffers of tax revenue and increase social spending.

Additionally, the resulting loss of investor confidence pushes borrowing costs higher, adding to the debt burden. As it stands, government debt in the Euro-zone has risen to 90.0% of GDP or EUR8.5trn in the 2Q12, from 88.2% of GDP or EUR8.3trn in the previous quarter.

Spanish bonds fell, pushing 10-year yields to the highest level in six weeks, as a Euro-zone report showed the region's economy contracted in the 3Q12, pushing it into recession.

Spain's 10-year yield climbed for a fourth consecutive week, the longest run of increases since June 2012, as the nation's government refrained from asking for aid from the European Central Bank's (ECB) Outright Monetary Transactions (OMT) programme.

The prevailing reluctance of the Spanish government to ask for aid is putting soft pressure on Spanish bonds, resulting in yields on its 10-year bonds to rise to 5.87% on 16th November 2012, from a recent low of 5.82% on 9th November 2012.

Over in currency markets, the dismal economic performance of the Euro-zone had also adversely impacted the Euro. The Euro fell to 1.2732 against the US dollar on 16th November 2012, from 1.2760 on 15th November 2012, a day after the report was released by Eurostat that showed the economy had contracted.

We believe the weakness in the currency, however, was likely mitigated by ECB's president statement, as he offered little hope for interest-rate cuts or other new stimulus measures, saying monetary policy was "already very accommodative." While GDP may decline only modestly in the 3Q12, a steeper fall looks to be on the cards for the 4Q12. Rising levels of unemployment as well as weakening business investments, mean that there is little prospect of a sustained improvement in economic conditions over the near-term. As such, we think the Euro-zone is likely to fall into a deeper recession and contract by 0.3% q-o-q in 4Q12.

Already, the PMI Composite Output Index fell for a third successive month, down from 46.1 in September 2012 to 45.8 in October 2012, according to the preliminary 'flash' reading based on around 85% of usual monthly replies.

Output has fallen continually since September 2011 with the exception of a marginal increase in January 2012. This suggests that the downturn in the Euro-zone is deepening at the start of the 4Q12.

On an annual basis, we forecast GDP to experience a contraction of 0.4% in 2012, following a slowdown to 1.4% in 2011. The ECB said in its quarterly projections on 6 September 2012 that the Euro-zone economy may expand 0.5% in 2013, half the pace projected in June 2012. Similarly, the International Monetary Fund (IMF) last month cut its 2013 growth forecast to 0.2% from 0.7% previously.

Both institutions expect an economic contraction this year.

In the medium term, we expect the Euro-zone economy to recover gradually, although the momentum will likely be dampened by tensions in some Euro-zone sovereign debt markets and their impact on credit conditions, and the process of balance sheet adjustment in the financial and non-financial sectors. The elevated levels of unemployment will likely continue to weigh on the underlying growth momentum.


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