Citi: Euro area recession likely to begin in Q4 | FT Alphaville

Citi: Euro area recession likely to begin in Q4

UPDATE: As a commenter pointed out, Willem Buiter didn’t write some of the sections we quoted from below, and we’ve updated accordingly. His name is at the top of the Citi note that we’re excerpting, but the actual passages were written by other economists. Apologies.

As in, the quarter that starts next week.

Citigroup’s economists go on a 2012 forecast-cutting binge in his latest note (bolding ours in all cases):

Over the last three months, we have cut our global growth forecasts for the current and following year by 0.65% (from 3.4% to 3.0% for this year, and from 3.8% to 2.9% for 2012). Within the last ten years, this pace of downgrades has been only exceeded in Q4-08 and Q1-09. …

Over the last three months, we have cut our growth forecasts in every single one of 16 major economies (advanced economies and emerging markets), a pattern only seen once in the last 10 years (Q4-08).

We expect growth to slow markedly in both the advanced economies and emerging markets. We forecast that GDP growth in advanced economies will slow from 2.6% in 2010 to 1.4% in 2011 and 1.3% in 2012, with emerging market growth slowing from 7.3% in 2010 to 6.0% in 2011 and 5.5% in 2012.

Probably best interpreted as a reminder both of how quickly things have deteriorated and also that such forecasts are better read for their deltas than for their levels.

Anyways, FT Alphaville previously explored Willem Buiter’s explanation of the likely political domino effects and logistical problems of a Greek exit. Buiter doesn’t expect that to happen — not yet, anyway, but it was a useful, if terrifying, exercise.

In this note Citi’s economists rehash some of Buiter’s earlier points but emphasise the deep uncertainty about the contagion threat to Spain and Italy and, especially, the accelerated timeline on which Europe now finds itself:

The most likely date for [Greek] restructuring is after the ratification of the EFSF enlargement is complete, which probably will be in late October or early November. At that stage, the existing official facilities could handle the direct implications of an orderly deep sovereign debt restructuring of Greece, Ireland and Portugal, a recapitalisation of the banks of these three countries, and of the banks in the core EA exposed to the outer periphery.

We expect Ireland and Portugal to follow Greece into sovereign debt restructuring soon afterwards, mainly because of ‘political contagion’. A Greek default would further raise the market assessment of the likelihood of default by these sovereigns, and undermine the political commitment to austerity in Ireland and Portugal. If Greece gets a deal that offers debt relief and further funding in return for efforts of questionable determination to tighten their belts, then Irish and Portuguese voters and politicians are likely to demand the same lenient treatment, especially given that they have so far stuck to the conditions of their programmes.

Early restructuring is likely to be far more disruptive to economies and financial markets, and we expect the Euro Area to fall into a fresh recession in coming quarters.

Nevertheless, there is a huge range of uncertainty, and it is unclear how much contagion will spread to other Euro Area countries, notably Italy and Spain. This is likely to depend on a range of factors. In particular, we assume that (1) Greece will not leave EMU, and nor will any other country; (2) there will be a large backstop facility, via the EFSF and/or ECB, for Euro Area countries other than Greece, Ireland and Portugal, notably Italy and Spain; (3) there will be more widespread recapitalization of European banks.

We’ve reached a stage where none of these can be taken for granted, obviously — and in the meantime Citi economists add that even with an leveraged EFSF, the creditor countries of the EU and the ECB are likely to request additional austerity measures in exchange for their support.


Even with a leveraged EFSF, additional fiscal tightening and tighter financial conditions are likely to be sizeable drags for Euro Area growth. Taking this into account, we revise down our Euro Area 2012 GDP growth forecast from +0.6% to -0.2%, now expecting a mild recession to start in 4Q 2011.

Related links:
If Greece can leave, anyone can leave – FT Alphaville
Economic forecasting delusions – FT Alphaville