Why Europe will not fall into recession

The Eurozone recession is not going to happen.

The region will record less than 1% growth for 2014, which isn’t too stellar, but bear in mind output in the European Union never actually fell last year and it’s not a strongly growing area of the world. That’s all a long way from returning to recession.

Much of the recent concern about growth comes from Germany, where Q2 GDP fell and August was a hideous month for industrial production, thus sparking fears of two successive quarters of negative growth. Whether or not this eventuates, the August weakness will almost certainly be shown to be primarily transitory.

Germany has had a poor few months, with growth expectations falling from 2.0% highs in July to just 1.4% in October, as a lot of industrial production fell – much of it related to the auto industry.

It is worthwhile noting that, despite the speculation about slowing global growth in the past two months, the consensus economics forecasts for global growth have remained steady for next year, with more growth expected in 2015 than in 2014 (mainly because the US has already picked up and is thought likely to continue to do relatively well).

What about external shocks?

During the month, the European Central Bank carried out stress tests of major European banks, evaluating their vulnerability to a major recession and financial market instability. These tests always discover some banks “swimming naked”.

Suffice it to say that the results were better than expected, leaving most of the banks free to concentrate on lending rather than shrinking their balance sheets.

A reversal in the falling price of oil could also force Europe into recession. However, this won’t occur either. There’s one primary reason for this: Saudia Arabia is not reducing production which is something they normally do when prices start falling. This has something to do with the fact they are no longer a pure monopolist, with US oil production doubling in the past six years.

 
Subscribe