Glum Economic Forecast for Europe

Floyd Norris' usual page-three Business Day "Off the Charts" column is a good one today:

FOR the first time since 2009, the economies of major developed countries are shrinking. The Organization for Economic Cooperation and Development, a group of 34 countries, said this week that the combined gross domestic product of its members declined at an annual rate of 0.6 percent in the final three months of 2012. It was a sign of just how far the global economy has weakened since 2010, when it appeared that the recovery was gathering strength.

It is unusual for downturns to be so widespread that they produce declines in the combined economies of the O.E.C.D. countries, which include all the major developed nations. Since 1962, when the O.E.C.D. statistics were first released, there have been only 13 quarters when that happened. The first three were in 1974 and 1975, during the worldwide recession brought on by the shock of soaring oil prices. There were four more in the early 1980s, during the double-dip American recession, one in 2001 and four in 2008 and 2009, during the credit crisis. 

On Friday, the European Commission issued a glum forecast, saying the 27 countries in the European Union would see economic growth this year of just 0.1 percent, while the euro zone economies would shrink by 0.3 percent. If the O.E.C.D. estimates are correct, each of those forecasts would represent an improvement from 2012. During the four quarters of 2012, the O.E.C.D. estimated, the economies of the entire European Union declined by 0.6 percent, while the euro zone economies were down 0.9 percent.

Why the shrinkage? Austerity. The lack of government spending. Something you would think that our leadership would be cognizant of as the sequester kicks in:

The recent weakness is unusual in that there has been no countercyclical support from governments in many of the countries when the economy weakened. 

Historically, it has been very unusual for government consumption to decline, but that has become common in many countries, including the United States. During the first decade of this century, there was not a single quarter where such consumption was lower in the United States or the euro zone than it had been a year earlier. But since then, that has become the norm, not the exception, in both regions. In the United States, federal, state and local government budgets have been squeezed, while in Europe, austerity has become the byword in many countries.

To get a sense of how bad things are in Europe, check out James Kanter's "Dismal Data and Gloomy Forecasts From Europe":

In the euro zone, the European Commission also forecast that unemployment would continue to rise this year, to 12.2 percent, up from 11.4 percent in 2012.

In Spain, the commission said it expected joblessness to hit 26.9 percent, up from 25 percent last year. In Greece, the forecast was for unemployment to leap to 27 percent from 24.7 percent a year earlier. 

Even in buoyant Germany, which is expected to grow this year by 0.5 percent, unemployment was seen nudging up slightly this year, to 5.7 percent, from 5.5 percent in 2012. 

The grim figures add fuel to a furious debate over whether an insistence on austerity is creating a self-perpetuating cycle where state spending cuts diminish demand, weakening tax revenue and further straining government finances.

This is the direction we're headed as soon as the sequester kicks in.