Specter of Second Recession Looms in West
Staff Writer, CNBC.com
After the turbulence of the summer, there has been plenty of speculation about whether Western economies may suffer a double dip into recession after recovering from the downturn of 2008-09.
"The indicators we are looking at generally suggest Western economies are teetering on the verge of recession," Stewart Richardson, partner at RMG Wealth Management, told CNBC Monday. "The crux of the argument is: Is it a mid-cycle slowdown or something a bit more dangerous on the downside?"
The Dow has fallen by 11 percent in three weeks after the first-ever downgrade of the US's credit rating by Standard & Poor's.
There are also growing concerns that larger euro zone economies such as France and Italy may be dragged into the troubles afflicting the country's more peripheral economies.
Analysts at Deutsche Bank on Monday cut their forecasts for euro area gross domestic producr growth in the second half of this year. Their new position is that the euro zone economy will have stagnant growth in the third quarter of 2011, and have cut their 2012 growth forecast from 1.5 percent to 0.8 percent.
"We seem to be trying to recover, but that could be the opening gambit in a bear market," said Richardson. "In this type of situation you have to have a cyclical recovery. We need to recover from '09 before any more fragility at all (happens)."
He believes that a third round of quantitative easing in the US will happen only after "real pain".
Over the weekend, there was renewed focus on the possibility of new euro bonds to rescue some of the struggling euro zone economies.
Wolfgang Schäuble, the German finance minister, indicated in an interview with Der Spiegel ahead of a key euro zone meeting Tuesday that euro bonds are off the table.
However, Germany's position appears to be that it would oppose euro bonds only "as long as member states conduct their own financial policies," Simon Derrick, chief currency strategist, BNY Mellon, pointed out to CNBC.
"The Southern European economies, Italy included, are going to have to give up economic sovereignty for fiscal union," he said. "If countries are prepared to give up economic sovereignty and give up to a single economic ministry, which will be German-dominated, then they would have to be prepared to go down this road."
Other finance ministers including Italy's Giulio Tremonti and the UK's George Osborne have said publicly that a European bond might help solve the region's debt crisis.