Recession in the Cards for Italy and Germany?

Uh oh, it looks like two of euro zone’s top economies could have some bad luck in 2012. Economic seers channeled Nostradamus in trying to predict the fate of Germany and Italy for next year and unfortunately, the big bad R-word popped up in their crystal balls.

Let’s take a look at the numbers to figure out the chances of that happening.

Italy

Just recently, the land of pizza and pasta released its third quarter GDP figure, which turned out to be in the red. The report showed that the Italian economy contracted by 0.2% during the period instead of staying flat which was what many were expecting. It was also much weaker than the 0.3% growth seen in the second quarter of the year.

Although the annualized GDP figure still showed growth of 0.2%, market participants began to worry that Italy could be headed for an even larger contraction next year. Bear in mind that the Q3 2011 GDP figure doesn’t take the recent belt-tightening measures into account. Oh, and did I mention that the austerity measures were made even tougher lately?

You see, earlier this month, Italian Prime Minister Mario Monti unveiled another set of austerity plans for the nation as they need to trim their deficit badly. He announced 34 billion EUR worth of tax hikes and spending cuts, which could further drag growth down in Italy. With that, economic seers forecast the Italian economy to contract by 0.4% in 2012.

Germany

And don’t think that the gloom and doom talks are only concentrated in Italy. Even the euro zone’s biggest economy, Germany, hasn’t been spared the negative vibes either!

Ahead the release of the official GDP figure, naysayers have already been speculating that Germany has already entered a “mild recession” in Q4 2011. They think that the debt crisis probably made businesses anxious about investing and demand for Germany’s exports from other EZ countries slowed.

But all hope isn’t lost! According to around 7,000 German companies surveyed by think-tank Ifo, business sentiment rose in December. The Ifo business climate index posted its biggest monthly increase since February in December, coming in at 107.2 from 106.6 in November.

It was the second consecutive month in a row that the report posted an increase and surprised expectations too!

Of course, this has gotten a few market participants giddy that maybe, just maybe, Germany would not fall in to the rut of recession in 2012. Some say that the German economy may expand around 5%-6% next year.

Sure, the debt crisis is still far from being solved which means that it could still weigh on Germany’s growth. However, we have to take note that the country’s domestic demand is looking A-okay.

It’s noteworthy to point out that aside from the positive Ifo report, Germany’s unemployment rate is at its 20-year low at 6.9%. On top of that, consumer sentiment according to GfK still remained upbeat at 5.6, matching its previous reading for November and topping the 5.5 forecast.

Both economies have dealt with the sovereign debt crisis fairly well for the past couple of years. But it looks like it’s finally starting to cause more serious damage to Italy and Germany. Does this mean the worst yet to come for them in 2012?

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