Prospects Daily: Euro Area is likely in a mild recession

Important developments today:

1. Euro Area is likely in a mild recession

Euro Area is likely in a mild recession. The escalation of the Eurozone debt crisis late last year, plummeting business and consumer confidence there, coupled with fiscal austerity across the zone, and little support from a generally weaker global economy, pushed the bloc a step closer to recession, with Q4 2011 GDP  contracting by 0.3%, according to final GDP estimates released by Eurostat today. Households fearful of weaker job market, fiscal consolidation and rising inflation, cut spending by 0.4% (q/q, sa). And with declining orders, businesses cut capital spending by 0.7% (q/q). The contribution of net exports was positive, but this was only because the fall in exports (-0.4%, q/q sa) was less than the decline in imports (-1.2%, q/q sa). Recent business surveys suggest that even though output in the Eurozone is contracting, the pace of decline has slowed down (February’s Markit Composite Index stood at 49.3 compared with 46.5 in October, with figures below the 50 mark indicating a contraction). And for Germany, which contracted by 0.2% in Q4 2011, output has begun expanding once again. The EU economy commissioner, Olli Rehn, noted this morning that “while the euro area is currently in a mild recession, there are at the same time signs of stabilisation”. The European Central Bank survey of professional forecasters project Eurozone GDP growth to contract by 0.1% in 2012.

Among Emerging Markets

In East Asia and the Pacific, Philippines’ consumer price inflation continued to recede further to 2.7% year-on-year (y/y) in February from 4.0% in January, with the reduction driven mainly by a 1.2% increase in food prices. However, non-food items rose at 3.7% suggesting a higher pace for core inflation (excluding volatile energy and food items).  

In Europe and Central Asia, Turkey’s consumer price inflation decelerated slightly to 10.2% (y/y), 0.2 percentage points lower than in January, but remained elevated compared to previous years partly due to base effects and increase in energy prices. 

In Latin America and the Caribbean, Brazil’s gross domestic product (GDP) grew at 2.7% in 2011 experiencing a significant deceleration from 7.5% growth in 2010 amid Europe’s debt crisis, hike in interest rates in the first half of 2011 and a strengthening currency. Manufacturing fell 3.1% in the fourth quarter of 2011 from the same quarter the previous year.