As world leaders struggle to resolve the eurozone debt crisis, the continent has a 30 percent likelihood of falling into recession, a new study warns.
According to the National Institute of Economic and Social Research, the chances of Europe going into a recession cannot be ruled out irrespective of the outcome of the euro zone crisis, with Spain and Italy at most risk.
There will be no respite for the world economy from the current downward trend at least for the year 2012, the think tank predicts. The institute projects global growth of 4 percent for the year 2011 and 2012, a half percentage point lower compared to its last projections. But it expects growth to resume in 2013, assuming a positive resolution to the euro zone problem.
A major part of the downward revision of the global growth is seen as the result of the recent developments in the financial markets which creates negative balance sheet problems in several sectors of the world economy. The exposure of the corporate bond yields over the government bond yields has widened significantly over the past three months, especially in the euro area and UK. NIESR says this will reduce growth by more than one percentage point in 2012 in all the European economies and by about three-quarters of a point in the U.S. and Canada.
Though emerging market economies stand relatively insulated against direct losses caused by a sovereign default, long-term protection cannot be expected. Severe disruption of trade with Europe and U.S. would cause indirect losses and could push smaller, more open emerging economies into recession. However, NIESR predicts more than 8 percent growth for the two major emerging Asian economies, India and China, in 2011 and 2012 and sees them as the major drivers of world growth.
NIESR attributes the recent gloom in world economies to the euro zone debt crisis and bases its forecast on a successful resolution by European leaders.