In Europe: S&P Says A Double-Dip May Be On the Way

4 October 2011

No Surprises Here

Deteriorating business sentiment in European markets and a projected slowdown of growth in the U.S. is weighing on economic growth prospects for Europe, says Standard & Poor’s Ratings Services today in the report “The Specter Of A Double Dip In Europe Looms Larger”.

As a result of market developments in recent weeks, Standard & Poor’s has for the second time in five weeks revised downward its projections for economic growth in the region for the next five quarters. We now forecast GDP growth in the eurozone at 1.1% in 2012, compared with 1.5% in our earlier projection. For the U.K., we expect a GDP growth rate at 1.7% in 2012, slightly below our 1.8% projection in August.

“We still don’t expect a genuine double dip to occur in the eurozone as a whole or in the U.K., but we recognize that the probability of another recession in Western Europe has continued to grow, said Jean-Michel Six, Standard & Poor’s chief economist for Europe. “We now estimate the probability of a new recession in Western Europe next year at about 40%, although in our baseline forecast we continue to anticipate sluggish and unevenly distributed growth in the coming five quarters.”

Business surveys from August and September point to a fresh deterioration in the business climate, visible not only in those economies typically most exposed to the sovereign crisis–such as Portugal, Spain, and Ireland–but also in the core countries of the eurozone and in the U.K. This reflects not just the slowdown in the manufacturing and service sectors across Europe since the beginning of the second quarter, but also sharply increased financial market pressures on European banks, the report says.

The cut in Standard & Poor’s predictions for economic growth in the U.S. also has significant implications for Europe’s foreign trade sector, given that the U.S. is the No. 1 destination for EU exports and the second destination, after the U.K., for eurozone exports.

“We still believe that robust demand from emerging markets, resilient consumers in key markets such as France and Germany, and the continued support of monetary policies will help avoid a new recession next year,” said Mr. Six. “Nonetheless, the downside risks should not be underestimated. They could conceivably come from financial markets through a fresh rise in long-term interest rates, or from the real side in the form, for instance, of lower growth in emerging markets.”


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