Investment Contrarians

Wake Up Folks! The Eurozone Mess May Be a Time Bomb

By for Investment Contrarians |

Wake Up Folks! The Eurozone Mess May Be a Time BombI hate that “R” word, but here we go—recession.

Don’t worry too much about the economic recovery in the U.S.; the real threat, as I have said on many occasions, will be the inevitable deterioration of the eurozone. What happens in the eurozone will have a domino effect on the rest of the industrialized and emerging markets worldwide.

Credit ratings agency Standard & Poor’s lowered its growth forecasts for the eurozone and suggested that the findings “paint a bleak picture” for the region. This shouldn’t be a surprise to you; I have long been bearish on the eurozone despite the bailouts and bond buying.

Standard & Poor’s estimates the eurozone will see its GDP growth contract by 0.8% this year, down from the previous -0.7%, followed by no growth in 2013, versus the previous estimate of 0.3% growth.

Spain and Italy were highlighted as the trouble regions. Spain will see its economy contract 1.4% in 2013. The country is working on austerity measures that are expected to be introduced this week, as the country may be looking at resolving its own debt issues and recession before requesting money from the ECB and other lenders.

A tough austerity program would bind Spain’s spending and have an impact on its ability to climb out of this recession. The country’s economic strength is declining. The country’s economy has fallen to 12th in the world in 2011, according to the International Monetary Fund (IMF). Previously, Spain’s economy was the ninth largest, but with its continued financial crisis, it has since been surpassed by Russia, Canada, and India. Regardless, a collapse in Spain would be devastating.

Reporting its fourth straight quarter of contraction, Italy also reported that the country is on the cusp of a recession. Greece is stuck in a recession and is asking for time to set its austerity measures to reach deficit reduction targets.

The reality is that the eurozone will likely slip into another recession in the third quarter, based on the regions’ Purchasing Managers’ Index (PMI). (Source: Markit.) The PMI reading for the eurozone came in at a weak 46.3 in August, down from 46.5 in July.

A third of the countries in the eurozone (six in all) are already grappling with a recession. By all estimates, the eurozone could contract by at least 0.2% and even more in the third quarter, following a 0.2% contraction in the second quarter, which would technically be classified as a recession.

The chart below clearly shows the growth issues in the eurozone since the great recession in 2008, when the region’s GDP contracted for four straight quarters. Even following the recession, GDP growth has been lackluster with a high one-percent growth in 2010. So far, two of the last three quarters have returned negative growth. These metrics are not good.

GDP Growth Chart

Copyright Lombardi Publishing, 2012; Data Source: www.TradingEconomics.com/Eurostat

And heading into 2013, Germany and France, the eurozone’s two largest members, could also falter into a recession, according to Capital Economics. Germany is stalling. Representing a survey of 7,000 German firms on their views towards the economic conditions, the country’s IFO index came in at its lowest level since August 2010.

The impact on the global economies from the eurozone fallout has been obvious. China is suffering and facing stalling in its export market. Chinese Premier Wen Jiabao is demanding a resolution and has offered financial support to the eurozone. China blames its current growth issues on the eurozone.

But the eurozone financial crisis is also having an impact on the developing countries that have increased their trade with the eurozone. The world’s poorest countries’ economies will be affected by about $238 billion, according to the Overseas Development Institute. For these emerging economies that have minimal resources, the impact will be that much bigger.

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