EU strugglers face tougher 2013

Poll shows austerity has caused southern economies to shrink far more than predicted

LONDON: Spain, Greece and Portugal face a tougher 2013 than previously thought, while the outlook for growth in Ireland, the only bright spot among the eurozone’s most vulnerable economies, was cut for the first time in nearly a year.

A Reuters poll of 46 economists showed austerity has caused the southern economies to shrink far more than authorities predicted but will only lead to slow fiscal improvement and unemployment will keep rising.

The outlook for Spain, Portugal and Greece has worsened in almost every quarterly poll since the first one was conducted in June 2011. The forecast for Irish growth was cut for the first time since April 2012.

The gloom is incongruous with optimism in financial markets that started when European Central Bank president Mario Draghi promised in July to do “whatever it takes” to preserve the euro.

Spanish stocks are more than 15% higher since the last poll in October and benchmark sovereign yields are down 250 basis points from a peak before his comments.

“Regardless of the improvement in market sentiment, the fundamentals are still pointing to steep falls in output in those economies,” said Jonathan Loynes, chief European economist at Capital Economics.

He said a lack of competitiveness inside the currency union, high levels of debt, and structural problems prevented economies growing and governments bringing debt down.

The poll showed that Greece, Portugal and Spain should exit recession next year, although growth will be so slow that it will hardly make up for the huge declines in output since the start of the sovereign debt crisis in 2010.

Furthermore, efforts to cut budget deficits will prove far more onerous than governments are suggesting.

Spain’s deficit will shrink to 6.1% by the end of this year, not quite at the 6% target the European Union set for 2012 and worse than the 5.3% forecast from October’s poll.

There was also a marked deterioration in forecasts for Spanish unemployment, where around a quarter of the work force is already out of work. The jobless rate looks set to hit 26.5% by year-end, compared with 25.8% in the last poll.

Predictions for the depth of Spain’s economic decline stabilised, with output expected to show a 1.5% decline for this year, unchanged from October’s poll.

Spain’s government, meanwhile, maintains the economy will shrink by just 0.5% this year.

Greece is destined to suffer another year of depression, and worse than October’s forecast, although economists think it will make better progress in slimming its budget deficit.

The economy will shrink around 4.3% this year compared to the 3% decline pencilled in last October. Economists think the jobless rate will reach 26.5% by the end of the year.

Still, the poll suggested the Greek depression is starting to ease, even if a recovery may be years off.

Economists expect Portugal’s economy will contract 1.7% this year, compared to a decline of 1.5% in the previous poll and after shrinking some 3% last year.

It will also miss its budget deficit target of 4.5%. The shortfall will be around 4.7% of gross domestic product by the end of 2013.

Ireland’s economy is the bright spot of the four economies, showing signs of a fragile recovery.

The poll suggested Ireland will grow around 1.2% this year, slower than the previous 1.5% forecast but better than most euro peers, including Germany, where the government cut its 2013 growth forecast to 0.4%. — Reuters