MacroScope

Europe’s recession trips up economists (again)

November 7, 2011

Europe’s economy is contracting at a steeper rate than most city economists recognise – and not for the first time.

While tiny Greece stole the headlines last week, a calamitous set of business surveys pointed to imminent recession for the enormous euro zone economy. Even a month ago, that was thought unlikely by most economists.

If city economists weren’t employed by global finance institutions, lots of them might make a living by closing barn doors after the horses have fled. Last week’s purchasing managers indexes (PMIs) were further proof of this.

The manufacturing and services PMIs, which have a great record of tracking economic growth, came in below the consensus of economists in 10 out of 12 surveys that cover the euro zone and Europe’s five largest economies.

More alarmingly, six out of the 12 PMIs were worse than even the lowest forecasts from dozens of economists.

Last month, the consensus of economists showed only a 40 percent chance of a recession in the euro zone over the next 12 months. That will surely rise above 50 in this week’s economy poll, especially given that Mario Draghi – the new president of the European Central Bank – last week said he expected a “mild recession” in Europe.

Being beaten to the punch by a central banker is one thing, but it looks like economists are about to repeat their unfortunate knack of predicting a recession only when it’s clear one has already started – for the second time in three years.

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