Euro zone: Darkening growth outlook but no recession

Since Nordic Outlook was published on August 30, euro zone data have, with a few exceptions, been weaker than expected. Indicators (Economic Sentiment Indicator, PMI composite) point to a marked slowdown in economic growth. Consequently, GDP forecasts for the euro zone have been revised downwards. GDP is expected to grow 1.7% in 2011, 0.5% in 2012 and 1.3% in 2013. A solution to the financial crisis is not yet in sight, which implies substantial risk of a recession. However, the statement by Merkel/Sarkozy presented last weekend that a plan for bank recapitalisation and a solution to the Greek crisis will be presented in time for the G20-meeting on November 3 is mildly encouraging. Inflation rose unexpectedly in September to 3.0% from 2.5% from the preceding month due to temporary effects. However, inflation is expected to recede as a result of decreasing capacity utilization and slowing growth. Inflation is expected to be below the ECB target in 2012 and 2013.

THURSDAY 13 OCTOBER 2011 Growth

Inflation

Labour-market

Andreas Johnson, SEB Economic Research +46 8 763 80 32

Key data Percentage change

2010 2011 2012 2013 GDP* Unemployment** Inflation* Government deficit***

Source: SEB

1.7 10.1 1.6 -6.0

1.7 9.9 2.6 -4.4

0.5 9.8 1.5 -3.5

1.3 9.6 1.6 -2.7

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insight

INDICATORS AND GDP Both the ESI (Economic Sentiment Indicator) and the composite purchasing managers index (PMI) indicate a marked slowdown in growth. PMIs have fallen and are below 50 for Italy and Spain. Germanys IFO sentiment index has also decreased but is still well above its long-term average. The euro zone is expected to avoid a recession, but GDP growth has been revised downward to 0.5% for 2012 (1.0% in Nordic Outlook August). Zero growth is expected during Q4 2011 and Q1 2012. As for individual economies, Germany is expected to be the best performer. Economic activity in Germany is holding up and growth is expected to pick up in Q3 after Q2s disappointing 0.1% increase. Growth in Italy and Spain will be weak however, with negative growth in Italy in 2012. Exports have recovered from their decline in 2008-2009 but recent performance has been shaky. Retail sales have stagnated, slowing down from an already very weak rate of growth.

GDP forecasts
Per cent 2011 Euro zone France Germany Italy Spain
Source: SEB

2012 0.5 0.7 1.0 -0.2 0.4

2013 1.3 1.4 1.7 0.5 0.8

1.7 1.6 3.0 0.8 0.8

Economic Insight

LABOUR MARKET AND INFLATION Unemployment remained at 10% in August and is nowhere near its pre-crisis level. The slowdown in growth implies that stagnation in the labour market will continue. The German labour market is still improving; the rate of unemployment declined to 6.9% in September and demand for labour is strong. However, since the labour market is a lagging indicator it is likely to turn worse in 2012 as growth slows down. Inflation rose unexpectedly to 3.0% in September from 2.5% the preceding month. Capacity utilisation is below the long-term average and is likely to decrease further as growth slows down. Inflation is forecasted to remain below the ECB target in 2012 and 2013.

No real improvement in the labour market

Per cent
22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 00 01 02 03 04 05 06 07 08 09 10 11 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0

The German rate of unemployment is decreasing

Hundreds of thousand and per cent
3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 00 01 02 03 04 05 06 07 08 09 10 11 9 8 7 6 13 12 11 10

Total

Less than 25 years

Source: Eurostat

Change in number of unemployed (LHS) Unemployment rate (RHS)

Source: Deutsche Bundesbank

Economic Insight

FINANCIAL AND MONETARY INDICATORS Yield spreads have narrowed somewhat recently but remain elevated, particularly in Greece. Ireland is well on track with its austerity program and a better growth outlook than the other PIIGS-economies resulting in shrinking spreads. Swap spreads indicate that stress in the European banking system has diminished somewhat recently, but spreads are very wide compared to the US. Weaknesses in the banking system might lead to a tightening of lending standards. Bank lending has stagnated recently and continuing uncertainty regarding the public finances crisis causes liquidity problems and most likely a further slowdown in bank lending. Monetary growth (M3) picked up somewhat in August but is still below the ECB target of 4.5%.
Signs of European bank distress
Basis points
90 80 70 60 50 40 30 20 10 0 -10 06 07 08 09 10 11 90 80 70 60 50 40 30 20 10 0 -10

Swap spread, Europe (10-year) Swap spread, US (10-year)

Source: Reuters EcoWin, SEB