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Euro Area Facing 'Outright Recession': Economist

The euro zone will be in a recession before the end of the year, an economist from the Royal Bank of Scotland (RBS) told CNBC Monday.

"The euro zone will enter a recession by the fourth quarter of this year, with contractions in growth for this quarter and the first quarter of next year, which in the current environment could be very damaging," said Silvio Peruzzo, European economist at RBS.

Peruzzo said with a sizeable contraction in the industrial sector, and chances of a disorderly Greek default remaining elevated, a recovery when it comes will be extremely modest.

He added that at the next European Central Bank (ECB) meeting in October—ECB president Jean Claude Trichet's last before he hands over the presidency to his successor Mario Draghi—is likely to include an interest rate cut of 50 basis points to mitigate the full effect of the recession.

"The ECB has been forced into crisis management mode due to the rising risks of severe economic fallout from sovereign and banking crises and the risks to the growth outlook on the downside. This is now the most likely scenario," Peruzzo added.

However, Bob Parker, senior advisor to Credit Suisse told CNBC.com that there was a good chance the markets could surprise analysts and investors with a rebound.

"With super easing of monetary policy, and assuming that a concrete plan is implemented for an orderly default of Greece, there could be a rebound," he said. The trigger for this would be a successful euro zone package and Chinese expansion among other things."

Without this, he said, markets would react negatively if there was no clear plan to implement the bailout fund from Europe, adding that there was "great investor impatience and intolerance" with the status quo.

He said it was "very important" for Greece to remain in the euro zone, but that an orderly default was crucial to avoid major economic fallout.

"If there's a run on the banks in Greece then there is a serious problem for the economy and that has to be avoided," Parker said.

Dispelling a major downside risk scenario was that corporate cash is at a record high and investors have record levels of cash, Parker told CNBC.com.

However, he warned that even if a recession did not occur, strong growth would not return to the developed world economies for years.

"Grinding mediocrity will continue for at least two years maybe three where we have low, unsatisfactory growth for the G3," he added.

Contact Europe: Economy

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