Sound bites: The Eurozone sinks deeper into recession - 1st quarter GDP drops by 0.2% qoq

The Eurozone is sinking deeper into recession and economic policy needs a radical rethink. This current recession is now longer than the 2008-2009 downturn and has no chance of abating soon, without a quick and substantive u-turn in Eurozone monetary and fiscal policies. Economic sentiment is on the rocks thanks to the debt crisis, inappropriately tough austerity policies and rising unemployment. The demand picture remains deeply depressed right across the board. Consumers are reeling, companies remain deeply cautious, governments are cutting back and the global trade outlook remains uncertain. The only potential bright spot is Germany which has been spared recession. Sadly German recovery at this stage is far too tepid to offer any meaningful help to the rest of the Eurozone. A change of policy direction is needed – and quick. Germany decoupling from the rest of the Eurozone simply rubs salt into a deepening political wound.

Eurozone policymakers need to redouble their efforts. As ECB rate cuts may be close to an end, the ECB must turn to unconventional monetary measures soon. A switch to quantitative easing must be applied. The ECB needs to pick up the QE baton in the same way as the US Fed and Japan’s BOJ to promote growth. It needs to flood the Eurozone with excess liquidity especially while inflation risks are so low, to help refloat recovery expectations.  At the same time, Eurozone governments need to abandon tough austerity in favour of fiscal policies promoting growth.

Without a change of direction soon, the odds are that the recession will extend through 2013 and spill over into 2014. A deepening recession would imply no going back with growing risks of the Eurozone blowing apart in the future.

(percentage change)
                          2013            2012  
    EURO ZONE           Q1  POLL      Q4    Q3    Q2
    pct change q/q    -0.2  -0.1*   -0.6  -0.1  -0.2 
    pct change y/y    -1.0  -0.9**  -0.9  -0.7  -0.5 

EUROPEAN UNION
    pct change q/q    -0.1          -0.5   0.1  -0.2 
    pct change y/y    -0.7          -0.6  -0.4  -0.3 

* Reuters poll of 34 economists, range -0.7 to 0.1 pct
** Reuters poll of 25 economists, range -1.5 to -0.6 pct