It looks like a recession in inevitable in the euro zone as the banking sector along with a combination of insufficient action by the regions politicians will continue to deflate European consumer confidence and erode funding for businesses.
Economists at Goldman Sachs (NYSE:GS) are expecting the euro zone to fall into recession in the fourth quarter, on the back of “a negative confidence shock and tighten fiscal policy, combined with private-sector de-leveraging in the periphery.” These economists are predicting overall growth of 0.1% for the single currency region next year, but say that “funding difficulties for banks represent a clear downside risk to this forecast.”
These same economists at Goldman have been preaching these dire warnings for several months now. While emergency measures such as bond buying by the European Central Bank offer a “degree of protection”, it warned that the woes of the banking sector could “at some point lead to a significant worsening of funding conditions for corporates and households, which in turn could turn the moderate recession we are forecasting into something more akin to the 2008-09 experience”.
Goldman added: “We think it reasonable to assume that the longer it takes to stabilize the situation in the banking sector, the greater the risk that bank lending behaviour will at some point lead to a sharp decline in economic activity.”
An economic recession can be avoided in Europe but resources are needed to calm financial markets, Pier Carlo Padoan, the chief economist of the Organization for Economic Cooperation and Development (OECD) was quoted as saying in a newspaper report on Thursday. “No, (a recession) can still be avoided. But at the European level there is a need for sufficient resources to calm markets and governments have to go forward with austerity measures,” Padoan said in the interview. “If this happens, we can not only exit the crisis but start again on a more sustainable and stable growth path,” he said.
A couple of indicators show that the euro zone economy is in deep trouble and that the debt crisis is denting confidence so badly that a recession looks almost inevitable. Figures last week showed that the euro zone narrowly avoided contracting in the third quarter, growing by only 0.2% during the period. Euro zone industrial orders collapsed by a massive 6.4% in September from the previous month.