Europe faces another daunting year

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Dogged by its debt crisis and mounting social unrest, Europe faces another daunting year despite progress made on several fronts in 2012.

Recession will continue to rage in some of the ailing nations, and intolerable levels of unemployment aren't expected to ease in the most troubled countries.

Indeed, numbers to be released Tuesday are expected to show the jobless rate in the euro zone inching ever close to the 12-per-cent mark in this era of austerity.

And just this week, as The Globe and Mail's Eric Reguly reports, former prime minister Silvio Berlusconi's latest moves threaten to plunge Italy back into political turmoil that is certain to play out in the markets.

That's the last thing the troubled euro zone needs after years of struggle that finally resulted last week in reform of bank supervision and a general calmer atmosphere surrounding the 17-member monetary union.

"Recessionary conditions will likely persist in the euro zone through the start of 2013 following a cyclical low point in the fourth quarter of 2012," said economist Sarah Howcroft of Bank of Nova Scotia in a recent report that forecasts the euro zone economy will shrink by 0.1 per cent this year.

"We anticipate continued progress on banking and, eventually, fiscal integration in the region, as well as advancements in domestic structural reforms, and external and fiscal rebalancing," she said.

"A slow and gradual return to trend growth rates should begin by mid-year, backed by recuperating confidence in recognition of the progress already made – both on a region-wide, institutional level and by individual states – and by accelerating activity in emerging markets, particularly China, which will support global demand."

Here's what she expects:

• Germany: Economic growth will moderate again, to 0.7 per cent this year, though “it will outshine that of its peers.” The trouble will come as a rebound in exports comes “only slowly” after tanking late last year.
• France: Expect “another difficult year” of higher unemployment, and higher taxes that will erode family budgets. Government attempts to meet a deficit target of 3 per cent of gross domestic product could mean further cutbacks, as well.
• Italy: Europe’s third-largest economy, hit hard in 2012, will get whacked again this year, its economy shrinking by 0.8 per cent. “The country now faces another round of political upheaval heading into the February general election, which is adversely affecting consumer and business confidence in the economy, and risks delaying the implementation of much-needed structural reforms,” Ms. Howcroft said.
• Spain: Already struggling with a devastated work force – one in four people can’t find jobs – 2013 will mark the country’s fourth year of recession since a real estate meltdown a few years ago, with Ms. Howcroft expecting a further pullback in the economy to the tune of 1.7 per cent.

Thus, there's a lot of pressure on the European Central Bank, which nonetheless isn't expected to act when it meets Thursday.

"Friday's U.S. payrolls data didn't exactly blow the doors off heightened market expectations, but on reflection they confirmed that while U.S. jobs growth was not as robust as had been expected, the American labour market still remains in much better shape than the European labour market, with euro zone unemployment expected to increase to another record high tomorrow when the latest unemployment figures ... are announced with a rise to 11.8 per cent expected," senior analyst Michael Hewson of CMC Markets said Monday.

While the ECB is expected to hold steady, "we could see pressure build for a rate cut in Europe if this week's data continues to disappoint on the unemployment front, which seems likely."