Invesco’s Greenwood: Eurozone Faces ‘Almost Endless’ Depression

Friday, 12 Apr 2013 07:59 AM

By Michael Kling

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Europe faces an “almost endless” depression if it sticks with austerity, predicts John Greenwood, chief economist at U.K. asset manager Invesco Perpetual.

“The prospects for GDP [gross domestic product] recovery in the eurozone in 2013 or 2014 are diminishing by the month,” Greenwood writes in his quarterly outlook, according to CNBC.

“My forecast is for real GDP growth of -0.2 percent, compared with an estimated -0.5 percent in 2012. In short, there will be no meaningful recovery in 2013, and there is a risk of the downturn extending into 2014.”

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Eurozone banks, he believes, will be more conservative in their lending following the eurozone’s bail out of Cyprus, which will aggravate the region’s economic problems.

“In view of this outcome, it is clear that the euro area orthodoxy implies further austerity and almost endless depression,” Greenwood says, CNBC reports.

The eurozone, he warns, may see deflation, especially in peripheral nations because of high unemployment and large amounts unused economic capacity.

“The longer-term danger is a ‘Japanization’ of Europe, as growth stalls and deflation takes hold.”

Greenwood joins a long list of economists criticizing austerity, which calls for cutting government spending.

The Sentix investor sentiment index has fallen in the eurozone because of repercussions from the Cyprus bail, reports the Guardian.

The monthly gauge of investor confidence in the region fell to -17.3, a substantial drop from last month’s -10.6. The new level is the lowest since last November.

Portugal Prime Minister Pedro Passos Coelho announced more cuts to the country’s health and education budgets in order to avoid a second bailout. Coelho said his country is still in a financial emergency two years after the first bailout, The Guardian reports. Portugal’s constitutional court this week ruled that cuts to pay and pensions of government workers are unconstitutional.

“The result is that there’s a hole in the austerity plan and everyone else is looking to see what happens,” said analyst Kit Juckes of Societe Generale, according to The Guardian. “Europe has no growth plan, and austerity into recessions is unpopular.”

U.S. Treasury Secretary Jack Lew, on a visit in Brussels, told EU leaders to strive to promote economic growth instead of austerity, The Associated Press reports.

“Our economy’s strength remains sensitive to events beyond our shores and we have an immense stake in Europe’s health and stability,” Lew said. “I was particularly interested in our European partners’ plans to strengthen sources of demand at a time of rising unemployment.”

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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