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Paris: The risk of a deep and prolonged recession in Europe may still appear remote but stagnation looks little short of certain at this stage, and some forecasters are already starting to concoct more catastrophic scenarios.
While a sharp economic downturn may take the edge off record inflation rates in the region, a marked deceleration in the pace of consumer price growth may depend as much on Chinese demand as demand in Europe, some analysts say.
"The euro area is staring recession in the face," economists at French bank Societe Generale said in a note issued on Friday, arguing this one could be as bad as the last big downturn that caused a surge in unemployment and government deficits in 1993.
Other forecasters, surprised by the extent to which regular surveys suggest the economy is slowing after a healthy start to to 2008, are lowering their sights too, and a growing number are now saying GDP probably contracted in the second quarter.
That would the the first quarter in the ten years since the start of monetary union that gross domestic product has shrunk in the euro zone.
The bloc as a whole as never seen a recession in the technical sense of two straight quarters of GDP loss.
JP Morgan bank also announced on Friday it was cutting its growth forecast for the euro zone for this year to 1.3 per cent from 1.7, saying its forecast now included a second-quarter drop in economic output and zero growth in the third quarter.
"The economy is now expected to stagnate for about a year," Sylvia Pepino, a London-based European economist for the Wall Street investment bank, said in a note. "The downturn seems to be more severe than we had previously expected."
Dipping confidence
The first official estimates for that period are not due to be published until the middle of August, but one monthly survey after another shows confidence plumbing new depths as well as sharp drops in exports, consumer spending and business output.
The closest the euro zone as a whole got to recession in 10 years of monetary union was when gross domestic product dropped to zero in the second quarter of 2003 following two consecutive quarters when GDP grew a negligible 0.1 per cent, according to data from European Union statistics office Eurostat.
Citi economists said in a note they also think the economy contracted in the euro zone in the three months to end-June.
While they did not see this an overture to recession, they said they did not share the optimism of the European Central Bank, which raised interest rates last week on the grounds that inflation worries outweigh worries for economic growth.
"In contrast to the ECB, we do not expect recovery towards trend-like growth in coming quarters," Citi's Europe economics team said in a weekly report on the outlook.
At Swiss bank UBS, chief European economist Stephane Deo and his colleagues see 0.1 per cent GDP growth in the second quarter versus the preceding three months, but more or less the same GDP growth rate over the following three quarters (0.1, 0.2, 0.1).
"2008 is history, the real debate now is 2009," Deo said in a weekly economics note, predicting a very weak second half but no recession.
The ECB and the European Commission were still counting on a revival to more normal trend rates of growth by mid-2009 at the latest, which was overly optimistic in UBS's view, he said.
"Weakness is not just confined to the euro area. We are very cautious in terms of UK and Swiss growth prospects. We also see slowdown looming in Scandinavia, albeit from a much higher level," the USB economics team said.
Indeed, in the euro zone, one interest rate policy dispensed by the ECB applies to 15 countries where economic fortunes vary widely.
Ireland's government is predicting just 0.5 per cent growth this year but many private forecasters see nothing but recession for an economy that was hooked on soaring house building and prices, fuelled by ultra-easy access to leveraged mortgage finance.
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