Experts differ on outlook for Europe

Britain is likely to be one of the hardest hit of the European economies, according to a report by Jamie Dannhauser, an economist at Lombard Street Research*.

In the third quarter of 2008 alone the country suffered a contraction in the supply of broad money along with falls in business confidence, car sales and mortgage approvals. These factors all contributed to the 0.5% drop in output.

While a recovery is forecast towards the second half of 2009, continued volatility in the bank funding market has severely weakened household spending after years of growth fuelled by cheap debt.

As lending continues to decline, money growth contracted by 0.6% with annual growth close to zero, the report says.

Andrew Milligan, the head of global strategy at Standard Life Investments, says: “This recession is very likely to be similar to the one experienced in the early 80s or early 90s. It will not be similar to the milder one experienced in 2001”.

The eurozone is faring slightly better with Germany expected to recover the fastest from the economic crisis owing to a lack of excessive debt problems, a provisional 0.3% increase in consumer spending in the third quarter and lower inflation. Having barely escaped recession in the third quarter, France is heading for a tough 2009 as a weak labour market and an annual house price inflation of 2.8% look set to overshadow timid increases in consumer spending and moderate overall debt levels.

But Spain and Italy are expected to experience the same type of long recession that Britain and America are entering, warns Milligan (pictured). Despite continued growth in the money markets the real question is whether deflation will hit the eurozone, as inflation is expected to dip below the European Central Bank’s 2% target rate in 2009. “There may be months or even quarters of deflation next year.”

But Milligan rejects the idea that a protracted period of deflation is imminent. “However, inflation volatility is likely to be a factor next year,” he adds.

Moving east, the sharp fall in commodity prices has hit Russia’s economy deeply with pressure mounting for the Central Bank of Russia (CBR) to devalue the rouble or let it float freely.

However, the CBR’s insistence on defending a fixed exchange rate will likely lead to further declines in the rouble, Lombard predicts.
UK Bulletin, November 26, 2008.