Professor brender forecasts zero growth in the euro zone

Anton Brender, chief economist at Dexia Asset Management

The sovereign debt crisis in the euro zone is still keeping the financial markets on tenterhooks. In the meantime, it has even spread to countries outside the periphery. While contagion risks via foreign trade appear manageable, contagion via financial markets could be much more severe, especially as core European countries are now also coming under pressure. Nevertheless, there are also some positive signals at the end of the year. Notably, agricultural commodity prices have calmed and oil prices have stabilized.

Back to slightly below-average growth?
In the U.S., the fear of a double dip fortunately proved to be unfounded. After a sharp drop in 1. Growth picked up again in the first half of 2011. Anton Brender, chief economist at Dexia Asset Management, warns against too much optimism, however: "This recovery is much weaker than all previous recoveries after the 2. World War. In fact, despite low mortgage rates, the economy has not and cannot expect any help from the real estate market: oversupply and extremely low real estate prices will continue to put the brakes on any recovery in this sector.Household deleveraging also weighs on consumption. When gasoline prices recently stopped rising, however, retail sales started to look a little better again. For the recovery not to falter, there must be a stabilization of the stock markets in the coming quarters, and wages must rise. Investment in machinery and equipment continues to rise. But from now on, exports will be a weaker support. Fiscal policy will become a particular burden in 2012. State and local governments in particular could slow growth if they do not receive support from the federal government. Against this backdrop and assuming a small recovery in equity prices, the USA could grow by around 2% in 2012. However, there are also good arguments for a more pessimistic assessment, according to Anton Brender. The policy has become an important source of risk in the U.S. The bitter dispute over the U.S. budget, which triggered the sharp drop in stock prices in July, is all but settled. And the eurozone crisis could worsen further and severely dampen growth.

The euro area is sliding into recession
In the euro zone, the large growth discrepancies between individual countries, which ultimately reflect differences in fiscal policy, remain an important factor. However, virtually all countries have been affected by the recent slowdown in growth. If the global growth slowdown is only temporary, exports to countries outside the euro area could pick up again somewhat. But the recent decline in purchasing managers' indices in Italy and France casts doubt on stable trade in the euro zone. Meanwhile, credit conditions for companies outside the financial sector have become tighter, and credit demand has weakened. Florence Pisani, economist at Dexia Asset Management, points to risks: in this environment, a sudden halt in corporate investment is likely. In view of the impending downturn, employment growth will slow and the unemployment rate in the euro area will gradually rise again. Against a strong consumption speak the only weak increase in purchasing power and the stricter credit conditions. Unfortunately, government finances are too weak to cushion such a downturn. On the contrary, up to now the response of governments to their cyclical imbalance has been to . Even more cost-cutting measures!Against such a backdrop, the summer's collapse in confidence likely brought a brief mild recession to the euro area. 2012 growth here is likely to be around 0%. When one considers the expansion of the sovereign debt crisis, one can easily become even more pessimistic. Despite the ECB's liquidity injection and its government bond purchases, a vicious circle of a weak banking system and sovereign debt crisis has emerged that is increasingly difficult to break. At best, the EFSF's resources can buy time. However, in order to put an end to the crisis and prevent a more severe slump in growth, policymakers must make a U-turn. Anton Brender and Florence Pisani agree: A new approach must have three goals: less uncertainty, a cap on interest rates and more growth. Such an approach is likely to be adopted in the next few months but until then volatility remains high.

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