Severe eurozone recession is unlikely, says LGIM economist

The eurozone has a good chance of avoiding a severe recession over the coming two years, according to Legal & General Investment Management.

The latest figures from Eurostat, the European Union’s statistical office, show the eurozone economy as shrinking by 0.1 per cent in the first quarter of the year, following a contraction of 0.3 per cent in the last three months of 2011.

Furthermore, more recent business surveys suggest that the currency bloc’s economy continued to contract during the second quarter of 2012 – and warn that the pace of decline could be speeding up.

LGIM economist Hetal Mehta: “The euro area debt crisis is undoubtedly a major concern. Fortunately, global economic conditions are much better than during the ‘perfect storm’ that started in 2008.

“2008 was notable for high and rising interest rates, tight credit conditions, oil at $150 and collapsing world trade. Those conditions just don’t exist today.”

LGIM expects the eurozone to undergo a “mild” recession this year, followed by near-zero growth in 2013. The obvious risk to this outlook, the asset manager notes, is a Greek exit from the bloc.

“If euro area policymakers can keep Greece in the single currency, our ‘muddle-through’ scenario of sluggish growth and painful economic adjustment is likely, but the risks are heavily skewed to the downside,” Mehta argues.

The economist’s comments come after data published resecently suggested the contraction in the eurozone economy is likely to have accelerated during the second quarter.

The Markit Eurozone Composite Purchasing Managers’ Index came in at 46.4 points in June, which was up from 46 in May but indicating that activity declined over the month.

Markit chief economist Chris Williamson says: “The final eurozone PMI for June picked up slightly on May, but the rise failed to avoid the region seeing the strongest quarterly downturn for three years in the second quarter.

“The survey points to the economy having contracted by approximately 0.6 per cent in the three months to June.”