Euro Economy to Shrink as Spain, Italy Re-Enter Recession

The euro-region economy will return to growth in 2013, with only Spain among its 17 members remaining in recession, according to the European Commission.

Gross domestic product will rise 1 percent in 2013 after declining 0.3 percent in 2012, the Brussels-based commission said today. While Greece will have the deepest slump, with GDP declining 4.7 percent, its economy may stay unchanged in 2013. Italy and Portugal will return to growth next year, while Spain’s economy may shrink 1.8 percent this year and 0.3 percent in 2013.

The report comes against a backdrop of renewed market turbulence after an anti-austerity revolt saw voters punish administrations at the ballot box in Greece and France while Spain on May 9 took control of the nation’s fourth-largest lender to assuage concerns. With the area’s economic slump deepening and unemployment at the highest in 15 years, governments may struggle to restore investor confidence. Fifty-seven percent of respondents in a Bloomberg Global Poll said at least one country would abandon the euro this year.

“We see slight euro-region growth in the second half of 2012 followed by a weak expansion in the following year,” said Christoph Weil, a senior economist at Commerzbank AG in Frankfurt. “We can’t really call it an upswing, more of a stabilization. Spain remains the problem child; they’re facing the biggest issues apart from Greece.”

The euro was little changed after the report, trading at $1.2944 at 12:43 p.m. in Brussels, up less than 0.1 percent.

Euro-Region Contraction

A euro-region contraction this year would be the first since 2009, when the U.S.-led banking crisis exposed the excessive borrowing and imbalances that plunged Europe into its sovereign debt troubles. Euro-region gross debt may average 91.8 percent of GDP this year, up from 88 percent in 2011, with the shortfall narrowing to 3.2 percent from 4.1 percent, the commission said. Greece may have both the biggest budget deficit and the highest debt burden this year, it said.

In Germany, Europe’s largest economy, GDP may rise 0.7 percent this year and 1.7 percent in 2013, according to the commission forecasts. In France, where Francois Hollande last weekend defeated Nicolas Sarkozy, becoming the first Socialist to win the presidency in 17 years, the economy is seen growing 0.5 percent and 1.3 percent this year and next, respectively.

‘High Uncertainty’

The outlook continues to be surrounded by high uncertainty,” the commission said in the report. “The largest downside risk remains an escalation of the sovereign-debt crisis in the euro area. A resurgence of financial turmoil due to negative confidence shocks would spill over to the real economy and reinforce negative feedback loops between fragile banks and weak sovereigns.”

Euro-region unemployment will probably average 11 percent this year, up from 10.2 percent in 2011, with Spain’s jobless rate the highest among members states at 24.4 percent, today’s report showed. In Greece, unemployment may increase to 19.7 percent from 17.7 percent, the commission said.

Economies around the globe are also showing signs of cooling. China’s industrial production grew the least since 2009 in April, retail sales rose less than estimated and inflation was below target, reports showed today. Malaysia’s central bank kept its benchmark interest rate at 3 percent and the U.K.’s economy probably contracted more than previously forecast in the first quarter after the statistics office reported a deeper slump in construction.

U.S. Confidence

In the U.S., the world’s largest economy, confidence among consumers probably declined in May, according to a Bloomberg survey. The Thomson Reuters/University of Michigan’s indicator will be released later today.

Eighty percent of the 1,253 investors, analysts and traders who are Bloomberg customers said they expected more pain for Europe’s bond markets this year. Respondents to the May 8 survey were also increasingly worried Spain will default and 84 percent forecast the euro-region economy to worsen.

In elections in Greece last weekend, voters flocked to parties opposed to austerity measures backed by German Chancellor Angela Merkel, denying the two main parties a combined majority and spurring calls for policies to boost growth. German Finance Minister Wolfgang Schaeuble said on May 9 that “if Greece decides not to stay in the euro zone, we cannot force” them.

Spanish Measures

Greece’s slump may ease after the economy contracted 6.9 percent in 2011, the commission said. Portugal’s GDP is seen declining for a second straight year, while the Irish economy may expand 0.5 percent in 2012. All three countries received external aid over the past two years.

In Spain, which is suffering from the aftershocks of the burst housing bubble, compounded by fiscal austerity and surging unemployment, gross debt will average 80.9 percent of GDP in 2012, up from 68.5 percent, holding above the EU’s 60 percent limit, with the deficit seen at 6.4 percent, down from 8.5 percent, the commission said.

Spanish Prime Minister Mariano Rajoy will announce further measures today to help cleanse lenders of real estate assets. The country will take over Bankia by converting its 4.5 billion euros ($5.8 billion) of preferred shares in the group’s parent company into ordinary shares, it said two days ago.

“Financial markets currently appear much more concerned about the lack of growth in Spain and the problems facing the banking system than about fiscal indiscipline and rightly so,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam. “Attention will now shift to the announcement from the Spanish government later today.”