Double-Dip Recession Hits Eurozone as Crisis Clouds Swirl

euro zone recession
By Jonathan Cable

LONDON -- The eurozone has sunk back into its second recession since 2009, a Reuters poll predicted on Thursday, as the debt crisis that has ravaged the continent for over two years continues to stifle growth.

A deluge of downbeat data pushed economists to revise down their growth forecasts. And with no end to the debt crisis in sight the chances the European Central Bank will cut rates further from current record lows have increased.

The 17-nation bloc's economy contracted 0.3% last quarter and will shrink 0.1% in the current one, according to median forecasts in the poll of 34 economists taken this week, meeting the technical definition of recession.

"The environment is deteriorating," said Uwe Duerkop at Landesbank Berlin, who sees two quarters of contraction and a flat end to the year.

"The question is how long this recession will last -- we have a chance to come back to growth at the end of the year but if the political crisis stays as it is with no [concrete] decisions there is a risk the recession could be longer."

The debt crisis began in Greece over 2½ years ago and Athens is still hammering out almost 12 billion euros worth of austerity cuts demanded by the country's lenders after a deal proved elusive at an initial round of talks on Wednesday.

Cyprus became the fifth member country to seek financial assistance last month, following in the wake of Greece, Ireland, Portugal and Spain.

World Bank President Jim Yong Kim warned on Wednesday that most regions of the world will be hurt by the debt crisis enveloping the eurozone and said it could trigger a deep global recession.

Reuters polls published on Thursday saw forecasts chopped across the board. Global growth is now seen at 3.2% this year and 3.7% next. That is weaker than the 3.9% growth the International Monetary Fund forecast for next year.

Germany, home to Europe's largest economy and the engine behind the bloc's growth, was a standout, as economists upgraded growth predictions for 2012.

In neighboring France the government's 2013 1.2% growth forecast has been knocked firmly out of reach by the crisis, raising the risk Paris may abandon its target of cutting its deficit.

Zero Bound

The European Central Bank cut its main refinancing interest rates by 25 basis points to a record low of 0.75% this month and the deposit rate to zero.

Medians in the poll do not see the bank cutting further but almost half, 28 of 71, said it would chop another 25 basis points in the next two months.

Only 16 of 52 said they would cut in a July 5 poll.

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"One would question whether it would make much difference, much more important would be their ability and willingness to grow their balance sheet, if we had an additional three-year LTRO that would help," said Mark Wall at Deutsche Bank.

The ECB flooded markets with more than 1 trillion euros ($1.23 trillion) of cheap loans in two three-year Long-Term Refinancing Operations. A poll of money market traders taken last month saw an increasing likelihood of another one.

Inflation, running at 2.4% in June, will ease in coming quarters the poll found and will fall below the ECB's 2.0% target ceiling early next year, giving it room to maneuver.

The struggling economy will contract 0.4% this year and grow just 0.6% in 2013. The forecast for this year has been unchanged in the last three polls but the 2013 forecast is revised down from 0.8%.

Widespread Debt: This Is Only The Beginning.
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Double-Dip Recession Hits Eurozone as Crisis Clouds Swirl

With a national debt still hovering around 120% of its GDP, Greece is still far from being out of the fiscal woods. As austerity measures bite, Greece's GDP will shrink further and its debt-to-GDP ratio will rise, putting it on course for further defaults -- er, "restructurings." Nor is Greece alone. According to official figures, debt-to-GDP ratios elsewhere are similarly high.

Photo: Gerasimos, an 83-year-old Greek man, picks through a heap of rubbish to salvage useful items as the marble gate of the Roman Agora is reflected in a mirror, in the Plaka district of Athens on Monday, March 12, 2012. Greece implemented the biggest debt writedown in history on Monday, swapping the bulk of its privately-held bonds with new ones worth less than half their original value. (AP Photo/Petros Giannakouris)

Debt-to-GDP ratio: 130%

Photo: President of Iceland Ólafur Ragnar Grímsson prior to voting in a referendum in Reykjavik, Iceland, Saturday, March 6, 2010.   Icelanders voted "no" in a nationwide referendum on approving the use of $5.3 billion of taxpayers' money to repay international debts.  The "no" vote may complicate Iceland's effort to recover from a deep recession and a banking collapse. (AP Photo/Brynjar Gauti)

Debt-to-GDP ratio: 120%

Photo: A man reads a newspaper in Milan, Italy, Monday, Jan. 30, 2012. European leaders are trying to come up with ways to boost economic growth and jobs, which are being squeezed by their own governments' steep budget cuts across the continent. The 27 EU leaders meeting in Brussels are also looking for common ground on a new treaty to toughen spending rules to dig the continent out of a crippling debt crisis. (AP Photo/Luca Bruno)

Debt-to-GDP ratio: 110%

Photo: Workers seen at the Luis Onofreâ luxury shoe factory in Oliveira de Azemeis, Portugal, Friday, Feb. 24, 2012. Debt burdens are rising fastest in European countries that have enacted the most draconian austerity programs. Portugal's unemployment rate hit a record 14 percent at the end of last year and the government imposed austerity measures to slash costs: Portugal cut pensions, reduced public servants' wages and raised taxes starting in 2010. (AP Photo/Paulo Duarte)

Debt-to-GDP ratio: 105%

Photo: People walk past a beggar on a bridge in Dublin Monday Feb. 20, 2012. Bank of Ireland, the only one of Ireland's six banks to avoid nationalization, reported it returned to net profit in 2011 thanks to heavy debt restructuring in the face of continued losses from dud loans. (AP Photo/Shawn Pogatchnik)

Debt-to-GDP ratio: 102%

Photo: The shadow of Republican presidential candidate, former Massachusetts Gov. Mitt Romney, is seen on a representation of the National Debt Clock as he spoke at a town hall meeting in Kalamazoo, Mich., Friday, Feb. 24, 2012. (AP Photo/Gerald Herbert)

Debt-to-GDP ratio: 85% each

Photo: Reflected in a window, people walk in London's City financial district, Tuesday, Feb. 14, 2012. Britain's AAA credit rating was put on a "negative outlook" by ratings agency Moody's, amid fears over weaker growth prospects and potential shocks from the eurozone crisis. Britain's Chancellor George Osborne said the assessment was a vindication of the Government's tough austerity measures and "a reality check for anyone who thinks Britain can duck confronting its debts". Moody's downgraded the ratings of six countries and also put France and Austria on the same caution as the UK amid violent protests in Greece. (AP Photo/Lefteris Pitarakis)

Debt-to-GDP ratio: 82%

It makes you wonder: Who will be next in line to default? And when they do, will we call that "good news," too?

Photo: A pedestrian looks at a sign in a shop reading: ''One euro, price haircut'' in Athens on Thursday, March 8, 2012. (AP Photo/Thanassis Stavrakis)

The IMF this week predicted a 0.3% contraction this year and 0.7% growth next.

Worryingly for policymakers, unemployment reached a new record of 11.1% in May and only around a third of the economists polled predicted it would fall below that rate before the end of next year.

Instead, it will climb higher in coming quarters, peaking at 11.5% in the first half of next year according to the highest median forecasts since polling began. ($1 = 0.8154 euros)

(Polling and analysis by Namrata Anchan and Ashrith Doddi; editing by Ron Askew)
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