Forex Flash: Eurozone contraction expected in 2013 – Goldman Sachs

For the Euro area as a whole, we expect a continued contraction, by -0.4% in 2013, before a return to positive growth of 0.9% in 2014. Our baseline is still that the Euro area will ‘muddle through’ but remain intact, predicts the Economics Research Team at Goldman Sachs. “Cross-country divergence remains a key theme in this baseline scenario, however, with economic weakness especially pronounced in Spain and Italy. Meanwhile, we see growth decelerating only marginally in Germany in 2013, and forecast some overheating in the subsequent years.”

The ‘long grind’ we forecast for 2013 is the result of the damaging but necessary combination of continued public sector austerity and private-sector deleveraging. Still, with financial conditions having eased quite substantially through enacted and prospective ECB policy, a sharper contraction has been avoided. “ECB policy will aim to reduce the segmentation of financial markets further with targeted measures such as the Outright Monetary Transaction (OMT) programme.” they note.