Double-Dip Recession Hits Eurozone as Crisis Clouds Swirl

euro zone recession
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%.

%Gallery-150609%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)

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