Whatever is decided at the Save the Euro summit, it seems certain the eurozone is heading into recession.
But not just any recession, this will be a protracted one reckons Citigroup.
Our economists believe the sovereign debt and banking crises are causing a renewed recession in the Euro Area. Beginning in 4Q 2012 [Sic], they forecast real GDP to contract for 6 consecutive quarters. It is expected to be an especially protracted recession. Not even in Japan, during its lost decades, did real GDP decline for 6 consecutive quarters. Our economists’ Euro Zone forecasts imply real GDP will be some way below the trend established during the first 10 years of Euro inception (Figure 3) and not get back to previous peak levels for many years to come.
“Not even in Japan, during its lost decades, did real GDP decline for 6 consecutive quarters”. That’s bad.
So, the obvious next question is, who will most affected?
Eastern Europe is the most exposed from a protracted Eurozone recession and deleveraging in the banking system, says Citi strategist Robert Buckland.
Given how Euro Zone banks and their subsidiaries dominate lending in Central and Eastern Europe (CEE), CIRA Banks analysts believe this will be the region most vulnerable to any deleveraging. For example, loans by Euro-owned banks are equivalent to about 100% of GDP in the Czech Republic and Poland (Figure 6). By comparison, loans by Euro banks in the Asian money centers, Hong Kong and Singapore, are equivalent to 40% of local GDP. And Euro banks make up an even smaller proportion of the loans (relative to GDP) in the major LatAm economies.
And not just because of the banks:
Central and Eastern Europe are most exposed to any weakness in Euro Zone imports. For example, Czech and Hungarian exports to the Euro Zone account for more than 40% of local GDP. Simplistically, a 1% contraction in Euro Zone exports would subtract about 0.5% from GDP in these economies.
Outside of Europe (Eastern or Western), Hong Kong has the biggest export exposure to the Euro Zone at about 14% of GDP. By comparison, Chinese exports to the Euro Zone make up just 4% and it is even less for the US. We should stress that Figure 7 highlights the potential trade vulnerability to a Euro Zone recertsssion. At the moment, our Euro Zone economists do not forecast a contraction in imports over the next two years (they forecast flat imports in 2012 and a 2% increase in 2013). So based on our forecasts, there may not be serious contagion via trade.
But what about the Eurozone’s other neighbour – the UK? Surely it must be high on the list of the exposed.
UK companies generate about 20 per cent of their revenues from Europe and it’s partly for that reason that Citi now expects UK corporate earnings to contract by 10-15 per cent next year (before bouncing back in 2013) .
The c10% 12 month fwd EPS growth (6% to end 2012) that analysts currently forecast is too optimistic. A figure of zero is what the ISM says.Top down we forecast that earnings growth will be -10% to -15% in 2012 following on from +15% for 2011. We reduce this forecast from the -10% we set inSeptember. This reflects the further deterioration in the European and UK economicoutlook coupled with greater stresses in the banking system, increasing thelikelihood of further write-offs.
In addition to which:
UK companies are also sensitive to the stresses in the banking system stemming from the Euro Zone. Thomas Cook has been a recent example. The company struggled to get funding for its working capital needs7 (click here for report). A new bank facility has been recently agreed, but at a higher cost to the company. Our strategists note that a lack of bank financing will probably be an important theme for companies over the next year or so. Companies in the UK may have to increasingly turn to vendor and supplier financing for working capital requirements.
Something for the PM and those Eurosceptic Tory MP’s to think about, then. We’re in this together.
‘Bulldog’ Cameron risks having his bluff called – FT