MORGAN STANLEY: Here's Our Grim Outlook For Europe's Key Economies

ECB European Central Bank Construction Frankfurt Germany SkyConstruction cranes cling to the new central headquarters of the European Central Bank in Frankfurt.

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Morgan Stanley chief European economist Elga Bartsch and her team released updated forecasts for every major economy in and around the euro area today, and the future as seen through their eyes looks pretty dark for Europe.The continent, plagued by the ongoing euro crisis, is feeling the effects of a massive slowdown in trade as countries implement brutal austerity measures in an attempt to bring ballooning debts back down to sustainable levels.

Everyone will share the pain to some extent, but there are a few countries Morgan Stanley sees as potential bright spots relative to their peers.

The euro area will be trapped in continued recession

GDP Growth Forecast

  • 2012: -0.5 per cent
  • 2013: 0.0 per cent
  • 2014-2018: 1.4 per cent

Unemployment Forecast

  • 2012: 11.2 per cent
  • 2013: 11.9 per cent

If the numbers above don't already speak for themselves, Morgan Stanley adds that it could get worse, writing that 'the risk to our downwardly revised, below consensus forecasts are still tilted to the downside due to policy uncertainty and aggressive austerity.'

Source: Morgan Stanley

Germany won't be able to escape the recession either

France will see decreased consumer spending as people lose their jobs

GDP Growth Forecast

  • 2012: 0.3 per cent
  • 2013: 0.5 per cent
  • 2014-2018: 1.7 per cent

Unemployment Forecast

  • 2012: 9.7 per cent
  • 2013: 9.9 per cent

Forecasting a rising unemployment rate in France, Morgan Stanley says that 'private consumption is expected to grow at extremely modest rates, as income activity should decelerate in line with the deteriorating labour market.'

Source: Morgan Stanley

Italy is vulnerable to financial contagion

GDP Growth Forecast

  • 2012: -2.5 per cent
  • 2013: -1.0 per cent
  • 2014-2018: 1.0 per cent

Unemployment Forecast

  • 2012: 11.0 per cent
  • 2013: 12.0 per cent

A confluence of factors in Italy means the 'psychology of contagion' could reach that country next, according to Morgan Stanley analysts, who write that 'a delicate political situation, some concerns around regional finances, and the banks' balance sheets, might make Italy vulnerable.'

Source: Morgan Stanley

Spain's sharpest declines in activity are still ahead of us

GDP Growth Forecast

  • 2012: -2.2 per cent
  • 2013: -1.3 per cent
  • 2014-2018: 1.0 per cent

Unemployment Forecast

  • 2012: 25.2 per cent
  • 2013: 25.4 per cent

While Spain is currently plagued by an insolvent banking system and its associated woes, Morgan Stanley says a bright spot is that 'Spanish exports are strong and are getting structurally stronger, thus providing a long-term comparative advantage Spain can build on.'

Source: Morgan Stanley

The Netherlands will tip back into recession in the second half of 2012

GDP Growth Forecast

  • 2012: -0.6 per cent
  • 2013: 0.2 per cent
  • 2014-2018: 1.3 per cent

Unemployment Forecast

  • 2012: 5.2 per cent
  • 2013: 5.5 per cent

Although the Netherlands was able to return to economic growth earlier this year, Morgan Stanley writes that 'with the highly leveraged Dutch consumers showing further signs of weakness in response to falling stock markets and declining house prices, the domestic demand outlook is relatively bleak for a core country with a AAA rating.'

Source: Morgan Stanley

Austria will outperform the euro area as a whole

GDP Growth Forecast

  • 2012: 0.6 per cent
  • 2013: 1.0 per cent

Unemployment Forecast

  • 2012: 4.0 per cent
  • 2013: 3.9 per cent

While Morgan Stanley analysts expect Austria to outperform against its neighbours, they note that Austria has its fair share of problems as well, writing that 'fiscal consolidation weighs on growth in 2013. Slowing growth in turn will hamper fiscal consolidation, on top of the government's involvement in the rescue of struggling banks (0.6% of GDP).'

Source: Morgan Stanley

Belgium's planned stimulus measures won't save its economy

GDP Growth Forecast

  • 2012: 0.2 per cent
  • 2013: 0.7 per cent

Unemployment Forecast

  • 2012: 7.3 per cent
  • 2013: 7.6 per cent

Belgium faces many of the same problems as its neighbours as the trade situation continues to deteriorate in the eurozone. Morgan Stanley writes that in spite of planned stimulus, 'private consumption is set to remain weak, in line with the deteriorating employment conditions. Tighter financial conditions should weigh on corporate investment.'

Source: Morgan Stanley

Portugal may need another debt restructuring

GDP Growth Forecast

  • 2012: -3.0 per cent
  • 2013: -1.8 per cent

Unemployment Forecast

  • 2012: 18.4 per cent
  • 2013: 20.6 per cent

Morgan Stanley says that although Portugal 'has so far been a good student' in terms of its willingness to implement creditor-directed austerity programs, 'the current determination in Europe to avoid another debt restructuring may be challenged further down the road, if the fundamentals deteriorate.'

Source: Morgan Stanley

Greece may put everyone through another nightmare scenario

GDP Growth Forecast

  • 2012: -8.0 per cent
  • 2013: -3.0 per cent

Unemployment Forecast

  • 2012: 22.6 per cent
  • 2013: 25.1 per cent

Greece is expected to enter its fifth straight year of recession in 2013. Morgan Stanley warns that 'when Greece approaches a balanced primary budget a year from now, the incentive to attempt to renegotiate the programme further, consider default, or even contemplate an exit from the currency union might rise again.'

Source: Morgan Stanley

Finland's increasing imports and decreasing exports will hold them back

GDP Growth Forecast

  • 2012: 0.9 per cent
  • 2013: 1.3 per cent

Unemployment Forecast

  • 2012: 7.7 per cent
  • 2013: 7.8 per cent

Finland sells its goods to other developed countries around the world who are buying less these days. However, Morgan Stanley says that 'domestic demand is expected to continue to contribute positively to overall growth.'

Source: Morgan Stanley

Denmark is feeling the euro crisis like everyone else but has a few tricks

GDP Growth Forecast

  • 2012: 0.5 per cent
  • 2013: 1.3 per cent

Unemployment Forecast

  • 2012: 7.8 per cent
  • 2013: 7.7 per cent

Although Danish exports won't be as robust -- similar to everywhere else around Europe -- Morgan Stanley expects that 'Denmark avoids slipping into recession thanks to fiscal stimulus and exceptional low interest rates supporting consumption spending and capex.'

Source: Morgan Stanley

Ireland will be the only peripheral country to grow in 2012 and 2013

GDP Growth Forecast

  • 2012: 0.3 per cent
  • 2013: 1.9 per cent

Unemployment Forecast

  • 2012: 14.7 per cent
  • 2013: 14.3 per cent

Morgan Stanley cites stronger fundamentals relative to Ireland's peripheral peers as driving its economic recovery, saying of the government's ongoing negotiations with creditors over bailout terms that 'a significant development on this front can greatly improve the sustainability of government debt, as debt up to €64bn (40% of GDP) could be taken off the government account.'

Source: Morgan Stanley

The U.K. is in for a bumpy ride

GDP Growth Forecast

  • 2012: -0.5 per cent
  • 2013: 1.0 per cent
  • 2014-2018: 1.9 per cent

Unemployment Forecast

  • 2012: 8.3 per cent
  • 2013: 8.3 per cent

Morgan Stanley notes that 'developments in the euro area crisis are very important for UK growth.' Given the outlook for the rest of Europe, business investment and export activity will suffer in the U.K. as they continue to implement austerity measures there.

Source: Morgan Stanley

Sweden will feel the effects of the euro crisis but is in a position to deal with them

GDP Growth Forecast

  • 2012: 0.5 per cent
  • 2013: 1.4 per cent
  • 2014-2018: 2.3 per cent

Unemployment Forecast

  • 2012: 7.8 per cent
  • 2013: 7.9 per cent

Sweden has been outperforming its neighbours in the eurozone economically and Morgan Stanley expects this to continue, even if growth slows, writing that 'Sweden is likely to maintain its strong fiscal position. The budget balance is likely to move into a small deficit in 2012, yet we expect it to return into balance in 2013.'

Source: Morgan Stanley

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