Europe Is Not Entering a Depression
By Doug Kass 06/05/12 - 12:00 PM EDT
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This column originally appeared on Real Money Pro at 8:02 a.m. EDT on June 5.
NEW YORK (Real Money) -- Pop quiz: What is the Street's consensus expectation for the eurozone's real GDP in 2012 and 2013? A. 2012 (-4.1%) and 2013 (-5.15%)
B. 2012 (-3.75%) and 2013 (-2.75%)
C. 2012 (-1.55%) and 2013 (-2.35%)
D. 2012 (-0.35%) and 2013 (+0.85%)
E. None of the above The answer, probably a bit surprising to most, is D. I am not denying the extent of the banking crisis, the challenges of chronic unemployment and the headwinds to economic growth in Europe. Nor am I claiming that the consensus will prove correct. I simply don't know, as the analysis of European economies is not in my wheelhouse. Rather, my point is that there is a lot of hyperbole in the media that Europe has already or is about to fall into a 1920s-like depression. Yes, economic conditions are weak in the eurozone, but for now, economic activity hasn't deteriorated much recently. Last night, the final May eurozone manufacturing and service index came in at 46.0. (The preliminary number was 45.9.) According to Goldman Sachs (GS), this is consistent with only slightly negative (of less than -0.2%) real GDP (quarter over quarter). As a reference point, I received an updated and lengthy analysis of Goldman Sachs' economic growth forecasts for Europe on Friday. Here is a synopsis of the firm's findings (bolded by me for emphasis):
Following the publication of first-quarter 2012 GDP data and the latest conjunctural indicators, we revise our forecast for economic activity in the euro area. We now foresee a contraction of real GDP of 0.5% year over year in 2012, followed by sub-trend growth of 0.4% year over year in 2013. As in our previous projections, Germany outperforms the periphery in terms of growth. But we now expect this to lead to higher German inflation than the euro area average, something that would make a start in affecting the macroeconomic adjustment required to address intra-euro area imbalances.My sense is that the Goldman Sachs team and other brokerages have large human capital invested. They spend 24/7 combing through statistics to develop their economic forecasts. I was exchanging emails with a friend of mine last night who reminded me that almost every brokerage missed forecasts by a wide margin in 2008-2009, both with regard to the drop in economic activity and on the ensuing economic recovery. (I am particularly sensitive to his comment as I held to a bearish and variant view back then.) Estimates, he reminded me, can collapse in a heartbeat. Economists, he said, are like the rest of us -- they look at selected data and guess. But, those solely dedicated to the analysis of economic growth are probably more equipped than the on-the-fly talking heads who, sometimes with limited analysis, talk hyperbolically about the inevitability of a depression in Europe. Consensus economic forecasts for the eurozone simply don't point to the inevitability of that depression.