Eurozone Headed for a Recession, MAPI Forecasts

May 25, 2012
Central Europe to outperform Eurozone but a slowdown is looming

The Eurozone is headed for a recession in 2012, much of it due to concern with the negative effects of the ongoing sovereign debt crisis weighing on both confidence and the outlook, according to a report covering 14 major industries from the Manufacturers Alliance for Productivity and Innovation (MAPI).

The report, "European Industrial Outlook," separately analyzes Western Europe and Central Europe. The former generally comprises the 17 countries of the currency union (Eurozone), while the latter includes the three largest economies of Central and Eastern Europe (CEE3): the Czech Republic, Hungary, and Poland.

Kris Bledowski, Ph.D., MAPI senior economist and report author, forecasts GDP to reach negative territory; -1.5% in 2012 and -0.4% in 2013. GDP growth in Central Europe will avoid the recession, with Bledowski envisioning 1.7% growth in 2012 and 2.3% growth in 2013.

"The overall financial crisis -- including the sovereign debt issues, the banking woes, and the mismanagement of various bailout programs -- is far from over and a rough road looms ahead for the Eurozone," Bledowski said. "Growth prospects rest mostly on exports. There are few signs that private investment will drive the recovery. Consumer confidence has been sagging along with feeble income growth and rising unemployment in most areas, with Germany, Belgium, Denmark and Finland being the exceptions."

Prospects are brighter in Central Europe. While manufacturing production is expected to rise by 1.2% in 2012 and by 1.5% in 2013 in the Eurozone, manufacturing production is anticipated to grow by 3.1% in 2012 and by 6.2% in 2013 in Central Europe.

"This area has generally grown faster than the Eurozone, and there is some strength in durable goods, with the region looking for third markets in Eastern Europe and South Asia; it also increased sales to Far Asia," Bledowski said. "In addition, there is greater domestic demand and an increase in capacity due to inbound foreign investment."

In the Eurozone, the report predicts 8 of the 14 industries will show growth in 2012, led by fabricated metals at 3.9%. In 2013, 7 of 14 industries are anticipated to grow, with fabricated metals and computers and electronics each expected to advance by 4.6%. Six industries -- wood and products, nonmetallics, textiles, paper and pulp, petroleum and coke, and rubber and plastics -- are expected to decline in both years.

Despite being in better economic shape overall, a majority of the 14 individual industries will experience some softness in Central Europe. Only 6 of 14 are expected to show growth in 2012, and 6 will increase in 2013. Motor vehicles should lead the 2012 growth sectors at 12.8%; for 2013, electrical equipment will advance by 14.6%.

Bledowski reports that one industry -- construction -- is in the accelerating growth (recovery) phase of the business cycle in the Eurozone, while seven are in the decelerating growth (expansion) phase. Five industries are in the accelerating decline phase (either early recession or mid-recession) and one industry -- paper and pulp -- is in the decelerating decline phase (late recession or very mild recession).

In Central Europe, two industries are in accelerating growth; nine are in decelerating growth; two are in accelerating decline; and one -- computers and electronics -- is in decelerating decline.

"As private sectors slacked, EU governments agreed to further depress aggregate demand through fiscal consolidation," Bledowski concluded. "The resulting underperformance of tax receipts and income will make it difficult in the short term to support growth."

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