Is There a Resolution to the Euro Area Debt Crisis?Answers NIESR

Posted: November 4, 2011 in Uncategorized
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National Institute of Economic and Social Research announced the world and UK economy forecast for 2011q3 period at a press conference in Westminster, where the organisation also launched its economic review no:218, yesterday.

The conference began with senior research fellow Dawn Holland’s presentation of the prospects for the world economy.

According to Holland’s presentation the world growth is to slow to 4% in 2011 and 2012.While China continues to drive global economy with %9.2 growth in 2011 and %8.6 in 2012; US economy that fell to %1.8 in 2011 will experience another fall by %0.2 in 2012.Japan economy that was damaged by the twin disasters in March 2011 will grow to %1.9 in 2012 from %- 0.3 in 2011.Canada’s economic growth will drop to %2.1 in 2012 from %2.4 in 2011. China is expected to overtake the US as the world’s largest economy by the end of 2018,explained Holland.

Dr Angus Armstrong,NIESR’s director Jonathan Portes,Research Fellows Dawn Holland and Simon Kirby at NIESR’s 2011q3 press conference in Westminster,London.

The probability of double-dip recession will remain high in Euro Zone of which economy will be driven mainly by Germany and France. However Germany’s growth will drop from %3.1 in 2011 to %1.6 in 2012 while France economy shrinks by %0.6 in 2012 due to Greece’s debt crisis and expected second recession in Portugal, Italy and Spain respectively. Japan is also expected to
have second recession in 2012 according to NESR 2011 third quarter forecast.

Global share prices rose sharply in the final quarter of 2010 and first quarter of 2011,but have fallen in the third quarter of 2011 due to deepening Euro Area Debt Crisis and downgrading of US government debt. Share prices in Japan, Canada and the US have dropped by %10-15 since July 2011, while Germany’s shares decreased by more than %20 due to ongoing global financial crisis and intensifying worries of double deep recession, further explained Holland.

Is there a resolution to the Euro Area Debt Crisis?

NIESR’s senior research fellows Dawn Holland and Simon Kirby explained that despite the 26 October 2011 outline of the leaders to tackle the crisis, Euro Area’s financial crisis continues deepen as uncertainties remain. However the Institution has three  possible scenarios for Euro Area .First one is “Muddling Through” where risk premia remain at current peaks up to a year. The second scenario is one of the sovereign default contagion. The third one considers Greece’s exit from the Euro Area.

Despite the fact that some policy makers hinted that allowing or forcing a Greek exit from EMU to the Euro Area debt crisis and some commentators supported it, it is dangerous even to contemplate such a move, as it would cause a run on Greek banks, collapse of the financial system and widespread bankruptcy with possible contagion to other economies, say NIESR’s
research fellows Holland and Kirby.

The UK economy, that has been experiencing the longest recovery since the end of the World War I, is expected to expand %0.9 this year ,%0.8 in 2012 before increasing by %2.6 in 2013.However it will stagnate at the end of this year and in the first quarter of the 2012, explained Simon Kirby in the second part of the press conference.

Consumer spending in the UK is expected to fall by %1 according to forecast while business and housing investments fall next year by %3.5 and %2.2 respectively. Unemployment is to rise to %8.9 at the end of the 2012.

Probability of second recession in the UK is expected to be %70 according to NIESR estimates which don’t take policy responses into considerations.

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