Expert Zone

Straight from the Specialists

Fallout of recession in euro zone

January 11, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

It will not be before February that the euro zone GDP numbers are out. The available information so far indicates the economy is already in recession. This will have serious consequences for all countries, including India.

The data for November is disturbing. Unemployment has hit a new peak of 10.3 pct and is possibly the worst in Spain where it has touched 23 pct. Naturally, consumption expenditure has declined in the euro zone by about 1 pct and will have a depressing effect on GDP growth.

Factory orders are down even in Germany which is the largest euro zone economy. The fall exceeded 4.8 pct although the industry was still flashing positive signals.

Indications are that the euro zone economy is already in recession and growth may have slipped 1.75 pct with some countries diving deeper. The debt crisis and subsequent agreements entered into by EU (excluding the UK), to bring about better fiscal consolidation, have forced a number of countries to cut public spending. While this may reduce fiscal deficit — the original sin — it will deepen recession further.

The recession in the euro zone will have adverse consequences for many countries. In India, the impact of the European debt crisis was visible right from the beginning of 2011 though it intensified since August. India was hit most in comparison to other countries. The stock market lost nearly 20 pct in 2011 in the absence of FII investment which also pushed the rupee down from 45 to 53 to the dollar. Simultaneously, there was a fall in direct foreign investment.

The recession in the euro zone will have a crippling effect on our exports which, presently, account for 21 pct of our total exports. Italy and Spain, which are more prone to debt crisis and recession, together share more than 3 pct of our exports. Already, the export growth is down. It was 4 pct in November.

It is quite likely that our exports to Europe will decline in 2012 and bring export growth into the negative zone in the first half of 2012. That is what had happened in 2009 when recession had hit developed countries.

There can be some compensation from economic revival in the U.S. though the pace of improvement is too slow. It is also unlikely any major measures will be introduced in the election year. Hence, the shortfall in exports to Europe is unlikely to the made up by exports to the U.S.

The secondary effect of the fall in exports will be on industrial production. About two-thirds of our exports consist of manufactured goods, the output of which had declined 5 pct in October. A further loss of external demand would create unemployment in industry and panic in the stock market.

The recession in the euro zone will have a serious fallout for India and weaken growth further. It is important therefore that the Europe factor is adequately counterbalanced by domestic measures in order to regain the momentum reached earlier.

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