Recession time for Europe

Recession time for Europe

The International Monetary Fund’s (IMF) traditional January World Economic Outlook (WEO) Update was announced Tuesday evening. Economic growth forecasts in September were pulled down sharply.

The IMF is pointing out that the high pace of the global economic recovery has slowed down. The main source of this stall is no doubt Europe and especially the eurozone. It is predicted that the financial crisis in Europe will lead to a mild recession in 2012. Some countries will experience a stronger recession, and in 2013 there will again be a mild recovery.

In the IMF forecast in September a growth of 1.1 percent was projected for the eurozone. The update Tuesday pulled this figure down to -0.5. The update on growth was downward 1.6 percentage points. In other words, 2012 will be a recession year for Europe.

This recession projection forecasted for the eurozone originates predominantly from countries such as Italy and Spain. The IMF is predicting that Italy will contract 2.2 percent in 2012 while Spain will contract 1.7 percent. For those two countries, forecasts in September consecutively were 0.6 and 0.8 percent. A second interesting point is that a negative growth is expected for both Italy and Spain in 2013.

‘Pink’ forecast for 2013
These forecasts of the IMF, which prefers a moderate “pink tone” while it is announcing its forecasts to the public, possessed quite a disturbing outlook.

The growth forecast of 0.8 percent of the eurozone for 2013 is based on the growth forecasts of 1.5 percent and 1 percent of Germany and France. These rather fall on the optimistic side. If it weren’t for them, then the year 2013 would also have become a year where recession was predicted.

The IMF notes this stark update was a result of the sharp rise in sovereign yields because of the debt crisis in Europe, the effects of bank deleveraging on the real economy and the impact of additional fiscal consolidation. Additional contractions in private investments emerge as a result of the deterioration of bank asset quality due to the financial crisis in Europe and as a result, euro area output is reduced. This is the main reason why WEO projections are lower by about 2 percent.

What has “saved” both the average of the developing countries in 2012 and 2013, and also the average global growth, is the growth forecasts of 1.8 percent and 2.2 percent for the United States economy. The reason for this relatively high growth rate is stated as the strong domestic demand dynamics of the U.S. economy.

Is Turkey 1.7 percent?
The IMF has pulled down almost all countries’ growth forecasts. The downward updates in the past used to be dominantly on developing countries; this time a higher rate of 0.80 percentage points of updates has been projected on growth forecasts of all countries including China.

In the IMF’s January outlooks, except for main groups and certain countries, no updates on forecasts are announced for other countries. However, the general downward update of 0.7 points for developing countries and 0.80 points for countries such as China and Russia should also be assumed valid for Turkey.

Based on this, the growth forecast that was announced as 2.2 percent in September 2011 for 2012, and then updated as 2.5 percent by the IMF Turkey Office, should be pulled down. If so, the IMF must have pulled down Turkey’s growth to 1.7 percent for 2012.

The economic growth in developing countries is also under risk of possible hard landings, the IMF points out. This is due to the worsening external environment and a weakening of internal demand. It is also noted that high credit growth and increased asset prices bought a strong increase in demand, but this may have led to overestimation of the trend growth rates.

We are reminded that should these dynamics unwind the impact of a possible hard landing could be very damaging.