Outlook for euro zone's strugglers worsens again

LONDON (REUTERS) - Spain, Greece and Portugal face a tougher 2013 than previously thought, while the outlook for growth in Ireland, the only bright spot among the euro zone's most vulnerable economies, was cut for the first time in nearly a year.

A Reuters poll of 46 economists published on Wednesday showed austerity has caused the southern economies to shrink far more than authorities predicted but will only lead to slow fiscal improvement and unemployment will keep rising.

The outlook for Spain, Portugal and Greece has worsened in almost every quarterly poll since the first one was conducted in June 2011. The forecast for Irish growth was cut for the first time since April 2012.

The gloom is incongruous with optimism in financial markets that started when European Central Bank President Mario Draghi promised in July to do "whatever it takes" to preserve the euro.

Spanish stocks are more than 15 per cent higher since the last poll in October and benchmark sovereign yields are down 250 basis points from a peak before his comments.

"Regardless of the improvement in market sentiment, the fundamentals are still pointing to steep falls in output in those economies," said Mr Jonathan Loynes, chief European economist at Capital Economics.

He said a lack of competitiveness inside the currency union, high levels of debt, and structural problems prevented economies growing and governments bringing debt down.

The poll showed that Greece, Portugal and Spain should exit recession next year, although growth will be so slow that it will hardly make up for the huge declines in output since the start of the sovereign debt crisis in 2010.


Furthermore, efforts to cut budget deficits will prove far more onerous than governments are suggesting.

Spain's deficit will shrink to 6.1 per cent by the end of this year, not quite at the 6 percent target the European Union set for 2012 and worse than the 5.3 per cent forecast from October's poll.

There was also a marked deterioration in forecasts for Spanish unemployment, where around a quarter of the work force is already out of work. The jobless rate looks set to hit 26.5 per cent by year-end, compared with 25.8 per cent in the last poll.

"I'm very worried. The indicators show that there is no recovery and until the European economic policy changes, that will continue to be the case," said Mr Jose Carlos Diez, economist at Intermoney, a Spanish broker.

"Spain and Italy need more time to meet their deficit targets and Germany needs a more expansive policy. But, as we start the year, there's this inexplicable optimism, which just doesn't hold up." Predictions for the depth of Spain's economic decline stabilised, with output expected to show a 1.5 per cent decline for this year, unchanged from October's poll.

Spain's government, meanwhile, maintains the economy will shrink by just 0.5 per cent this year.


Greece is destined to suffer another year of depression, and worse than October's forecast, although economists think it will make better progress in slimming its budget deficit.

The economy will shrink around 4.3 per cent this year compared to the 3.0 per cent decline pencilled in last October.

Economists think the jobless rate will reach 26.5 per cent by the end of the year.

Still, the poll suggested the Greek depression is starting to ease, even if a recovery may be years off.

"Latest readings of forward-looking indicators provide the first solid evidence of a sustainable improvement in confidence," said Mr Nikos Magginas, economist at the National Bank of Greece.

"Trends in exporting sector - especially tourism - appear far more supportive compared with 2012." Greece's economy will eke out a tiny amount of growth in 2014, perhaps around 0.2 per cent, the poll showed.


Economists expect Portugal's economy will contract 1.7 per cent this year, compared to a decline of 1.5 per cent in the previous poll and after shrinking some 3 per cent last year.

It will also miss its budget deficit target of 4.5 per cent.

The shortfall will be around 4.7 per cent of gross domestic product by the end of 2013.

Portugal's European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) lenders, under a 78 billion euro (S$128 billion) bailout, agreed last September to ease the fiscal goals for 2012 and 2013, citing the country's good record in following its austerity programme. Portugal's tax revenues have plummeted in the steepest recession since the 1970s.

"We see economic conditions in Portugal remaining depressed this year, hit by tighter fiscal policy, high and rising unemployment and muted external growth," said Mr Diego Iscaro, economist at IHS Global Insight.


Ireland's economy is the bright spot of the four economies, showing signs of a fragile recovery.

The poll suggested Ireland will grow around 1.2 per cent this year, slower than the previous 1.5 per cent forecast but better than most euro peers, including Germany, where the government cut its 2013 growth forecast to 0.4 per cent.

The Irish economy is still more than 10 per cent smaller than before the crisis began in 2008 and although progress is being made, economists warned that it could be knocked off course.

"There are so many uncertainties that you'd be mad at this stage to get a tattoo of 1.3 per cent growth put onto your hand or some other part of your anatomy," said Mr Austin Hughes, chief economist at KBC Ireland.

"But while again consumer spending will be a drag, it will be nowhere like the drag that we've seen. The nature of Ireland's export beast is that you should be able to eke out a significant positive contribution even if the global economy is soft."

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