Is Another EU Recession Likely?

Concerns are developing (here) that the European sovereign debt crisis could trigger another recession that spreads from the EU area to the US. In an appearance before the US Congress yesterday, US Fed chair Ben Bernanke warned more government action would be needed to prevent a recession in the US. The transmission for this recession would be the banking systems of both the EU and the US which are heavily interconnected.

My business-as-usual (BAU) GDP forecast for the EU is presented above. Actual GDP is displayed as a solid line while the attractor value is the dashed red line with the 98% bootstrap confidence intervals displayed in green and blue dashed lines. After 2003, the EU bubble began developing and peaked in 2007 followed by a crash in 2009 to very low levels in 2010. The model suggests that forces will began pushing the economy back to its attractor value but that does not mean that that future shocks (such as a Greek default) could not push the EU to improbably low GDP levels.

The European Economic Commission's forecast for 2010-2012 (here) suggest that:

The European Commission's autumn forecast foresees a continuation of the economic recovery currently underway in the EU. GDP is projected to grow by around 1.75% in 2010-11 and by around 2% in 2012. A better than expected performance so far this year underpins the significant upward revision to annual growth in 2010 compared to the spring forecast. However, amid a softening global environment and the onset of fiscal consolidation, activity is expected to moderate towards the end of the year and in 2011, but to pick up again in 2012 on the back of strengthening private demand.

The graph above displays the EEC's confidence interval for GDP growth rates. The EEC forecast suggests a small probability of negative growth rates after 2011.
The annualized growth rate of the BAU attractor for GDP in the EU is displayed above. My forecast is for a continually decreasing growth rate approaching zero after 2060.

The definition of economic depression (here) is a little squishy (a drop of more than 10% in GDP lasting for three to four years). In terms of attractor models, the EU economy has been underperforming ever since 2009. The rate of return to the modest growth rates predicted by the BAU GDP attractor will depend on future financial and non-financial shocks to the EU economy.