Euro Zone Economy to Shrink Twice as Much as Previously Forecast

Gross domestic product in the 17-nation euro zone will shrink by 0.4% in 2013 according to The Economist Intelligence Unit’s latest Global Outlook Report. The Economist Intelligence Unit previously expected a contraction of 0.2%, however it now believes the euro zone economy will contract further than expected as government austerity continues to dent consumer demand and bank lending remains weak in most countries.


Chinese growth slows
The Economist Intelligence Unit has also downgraded the GDP forecast for China to 8.4% from 8.5%. This is due to the property market, a key benchmark for China's economy, expanding too rapidly to suit the government, which has announced a new series of measures to cool demand. Moreover, retail sales growth has also been slower than expected impacting the country’s overall growth prospects.


US economy remains resilient
Moving away from the euro zone, the US economy is proving remarkably resilient to a series of fiscal shocks.


Private employers created nearly a quarter of a million jobs in February and retail sales surged. The housing market continues to recover and car sales are climbing steadily. However, the accumulated effects of the tax increases and government spending cuts will almost certainly be felt, slowing what otherwise might have been a strong year for the US economy.


Impact of Cypriot bailout
The recent bail-out agreement between the EU and Cyprus has renewed fears of contagion to larger euro zone countries and, as a result, has had a significant impact on the economic forecast. The debacle surrounding a possible tax on Cypriot bank deposits has raised fears of similar action in Italy and Spain, which, in the worst case, could lead to a run on the banks in those countries as depositors search for safe havens.


Despite the troubles in Cyprus, Germany's economy is reviving. Manufacturing in February expanded for the first time in a year and business and consumer sentiment in the country are rising steadily.



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