Tags: eurozone | recovery | economy | contraction

Eurozone Laggards Face Long Wait for Recovery

Monday, 22 April 2013 01:26 PM

The struggling economies of Greece, Portugal and Spain will probably not grow again until next year and former Celtic tiger Ireland is likely to purr rather than roar, a Reuters poll suggested on Monday.

The poll of around 40 economists, taken in the past week, showed tough austerity measures are still hampering the four eurozone economies. With unemployment expected to rise further, there is little hope for substantial near-term growth.

Median forecasts were largely cut from a similar poll taken in January. The outlook has worsened in almost every quarterly poll since the first one was conducted in June 2011.

Only Ireland's economy is expected to grow this year. At a comparatively healthy 1 percent, rising to 2 percent in 2014, it will outperform the wider euro zone.

The global economy has struggled. This year now looks unlikely to deliver much improvement on 2012, but growth should pick up to 3.8 percent next year.

Cyprus became the latest member of the 17-nation currency bloc to seek a sovereign bailout, following in the footsteps of Greece, Ireland and Portugal. Spain has had help with its banks.

But Spain's success in raising funds from the bond market in the last few weeks has led to far fewer economists expecting it to need its own sovereign bailout as well.

Greece and Spain both have more than one in four people unemployed and Monday's poll predicts there will be scant improvement next year. Unemployment in Ireland and Portugal is also expected to be higher than in the bloc as a whole.

Austerity policies, including cuts in public sector pay and pensions and higher taxes, will keep Greece's economy in a sixth straight year of recession in 2013, with the poll projecting a 4.5 percent contraction, in line with government forecasts.

The Cyprus crisis may have a 0.2 to 0.5 percent negative impact on Greece's GDP, but the government expects this will be offset by a strong tourism season.

"In the near term, some negative spillover effects from Cyprus are likely to hit Greece's economy," said Giada Giani at Citi.


Lisbon has also hiked taxes and cut spending to meet deficit reduction goals set out under its bailout. Consumer demand and investment have collapsed, causing the deepest recession in western Europe's poorest country since the 1970s.

The poll forecast a 2.4 percent contraction this year with growth of 0.3 percent next, similar to government projections, after last year's 3.2 percent slump.

The government says it wants to prepare a growth strategy without compromising its deficit goals as it seeks to exit the rescue program as planned by mid-2014.

"A lack of growth and weak internal demand are, of course, important risk factors to meeting the deficit targets, but our current scenario accommodates the goals, they can be reached," said Teresa Gil, an economist at Banco BPI in Lisbon.

Spain's economic outlook remains a 1.5 percent contraction this year, unchanged for the third consecutive poll, although there are signs of improvement as Madrid sold sovereign debt at borrowing costs not seen since November 2010.

In an interview published on Monday in the Wall Street Journal, Economy Minister Luis de Guindos said the government's official forecast will be revised down to a contraction of between 1 percent and 1.5 percent.

Previously, the government had forecast a contraction of only 0.5 percent this year in GDP.

The poll median was at the bottom end of his new forecast.

"We believe the Spanish economy will go from a contraction to growth in a scenario with little dynamism," said Estefania Ponte, strategy director at Madrid-based Cortal Consors.

In contrast, unlike much of the eurozone, Ireland's economy has grown for the last two years. But it contracted in the third quarter of 2012 and was flat in the fourth as weak global demand weighed on the country's export-focussed strategy.

"The shadow of growth and the political stomach for further adjustments are the key issues. That means that you can't simply extrapolate forward and say yes, Ireland will bound beyond the finishing line. It is likely that that will occur, but it promises still to be a bumpy route," said Austin Hughes, chief economist at KBC Ireland.

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The struggling economies of Greece, Portugal and Spain will probably not grow again until next year and former Celtic tiger Ireland is likely to purr rather than roar, a Reuters poll suggested on Monday.
Monday, 22 April 2013 01:26 PM
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