S&P says Europe may be heading for a recession

A flurry of fresh economic data suggests that initial expectations of Europe remaining relatively immune from the U.S. slowdown were overly optimistic, according to the latest economic forecast from Standard & Poor's Ratings Services.
The report explore the headwinds that European economies currently face, from slower growth in world trade, to an overvalued euro, from stagnating real incomes for consumers to a fall in asset prices.

"As a result of this new negative data, consumer and business surveys consistently show that the fear of an actual recession dominates," said Jean-Michel Six, chief economist for Europe. "With inflation doggedly remaining high, the question remains: Will Europe enter stagflation–stagnation plus high inflation–or even worse a genuine recession?"

With GDP growth in the Eurozone contracting at a 0.8% annual rate in the second quarter, this indicates that a major slowdown is about to occur in the second half of this year.
"We consider the outlook for inflation in the next 12 months to be probably the most critical variable for Europe's economies," Six noted. "Indeed, a deceleration on the back of lower oil prices would create a very different environment for monetary policies and provide a relief for hard-squeezed consumers."

Until then, however, Europe should brace itself for a period of stagflation, although within this overall picture some diverging trends will occur.

According to Six: "While Germany and to a lesser extent France are likely to show some resilience thanks to strong fundamentals, the Spanish economy is bound to experience at least two quarters of negative growth, which would qualify it as being in a technical recession."
He added that the elevated level of household debt and the sharp downturn in housing that we forecast suggest that the U.K. is more exposed to a true recession than the Eurozone considered as a whole, although we think this shock will be less dramatic than previous recessions in the early eighties and nineties.