The euro area will survive current austerity, NIESR forecasts

LONDON | The National Institute of Economic and Social Research in London said the European Monetary Union will take a long year and a mild recession before finding its way towards growth. The UK’s economy would evolve along the same path. In a prospect note, analysts at the NIESR indicated that their baseline forecast is for global growth of 3.7 percent in 2012. Growth will accelerate to 4 percent in 2013.

“We assume a delayed but ultimately successful resolution of the euro area crisis,” the institute remarked. “Nevertheless, we expect a mild recession in the euro area as a whole, as well as in the UK. Downside risks to the euro area remain high. Fiscal austerity will weigh on growth in the short term, while medium to long term structural problems remain unresolved.”

The NIESR forecast growth of about 2 percent in the US this year, while China and India, although slowing, will continue to drive world growth.

Economic prospects deteriorated sharply towards the end of 2011, as the euro zone sovereign debt crisis threatened to ignite a second global banking crisis. But experts at the institute believe that policy actions by the European Central Bank appear to have averted the immediate danger by pumping €530 billion in 3-year longer-term refinancing operations into the European banking system in February. Tensions in European financial markets have eased since February.

Nevertheless, the NIESR report carried a strong critique against the excessive importance plans to solve the crisis in the euro area are putting on budget cuts.

“Fiscal austerity is depressing growth in those countries most affected by the crisis; this in turn reduces tax revenues, making the restoration of fiscal sustainability and hence market confidence even more difficult. This risks a negative feedback loop; downside risks, both economic and political, therefore remain high.”

Elsewhere, while short-term global prospects have improved marginally since January, a rise in the oil price has largely offset the gains from the decline in short-term uncertainty, the paper said. In the immediate term, then, things look shaky.

“We continue to expect a recession in the euro area and the UK in the first half of 2012. We forecast relatively slow growth (about 2 percent) in other developed economies.

“In the US, this assumes that fiscal policy is not tightened abruptly; were this to be the case, growth would be significantly slower. Fast, although slightly slowing, growth in China and India, continues to drive global growth, for the year as a whole.”

Only in one year time, the skies will begin to clear.

“In 2013, we see some rebalancing of global growth, as the euro area recovers somewhat, growth picks up further in the US, and China continues to slow. Global current account imbalances, however, remain elevated, although not at pre-crisis levels.”