According to the Wall Street Journal, the European Commission on Thursday predicted that “the euro-zone economy will fall back into recession at the start of this year and is now seen contracting in 2012 as a whole.” These new forecasts are expected to add to concerns about the impact of broad-based regional austerity plans. The 2012 forecasts for three of the countries applying significant fiscal consolidation — Italy, Spain and Greece — were all slashed. Among the most significant changes in the forecasts was Italy’s 2012 outlook. The Commission now anticipates Italy’s GDP to contract by 1.3 percent compared to projections of a 0.1 percent expansion last autumn. Meanwhile, Spain’s economy is now projected to shrink 1 percent in 2012 compared with the 0.7 percent growth forecast in November 2011. “On an annual basis,” the Journal states, “the 17-country euro-zone group is forecast to contract by 0.3 percent and remain unchanged in the larger European Union.”
Bloomberg adds, “The full-year Europe-wide contraction would be the first since 2009, when a 4.3 percent drop in the wake of the U.S.-led banking crisis exposed the overborrowing and imbalances that plunged Europe into its sovereign debt troubles.” The forecasts come two days after Greece clinched a second bailout and showed an economy “pockmarked” by the two-year-old fiscal crisis and poised to stiffen resistance in southern Europe to additional rounds of German-demanded austerity.
Reuters, meanwhile, notes that “German business sentiment rose to its strongest in seven months in February, offering fresh evidence that Europe’s largest economy will dodge a recession even as euro zone peers tighten their belts to fight off the sovereign debt crisis.” Ifo’s business climate index, based on a monthly survey of approximately 7,000 companies, rose to 109.6 in February. According to the Munich-based think tank, that was the fourth consecutive increase and the highest its been since July 2011.