Little reason for bankers to cheer about the year ahead

The after shocks from the euro-zone turmoil is threatening to plunge Europe back into recession and destroy the single currency. The National talks to financial analysts about the problems ahead.

Analysts expect a euro zone recssion. Chris Ratcliffe / Bloomberg News

Aftershocks from the euro-zone turmoil are threatening to plunge Europe back into recession and destroy the single currency. The National talks to financial analysts about the problems ahead.

q&a

q Will the euro zone still be intact at the end of the year?

a Vicky Redwood, the chief UK economist at Capital Economics: We are expecting a limited break-up of the euro zone, which could begin with the departure of Greece this year.

q Will the euro zone slip into recession?

a Howard Archer, the chief UK & Europe economist for IHS Global Insight, a financial analysis company: We expect a euro-zone recession to occur in … the first half of 2012 in the face of the ongoing sovereign-debt crisis. Tight credit conditions resulting from persistent funding problems for banks, tight fiscal policy, the pressures facing consumers and muted global growth [will have major impacts].

q Any signs of recovery in Europe?

a Mr Archer: We expect the euro zone to start growing gradually again during the second half of 2012, although much will depend on sovereign-debt developments. It is vital that euro-zone policymakers get a grip on matters quickly, because if Greece suffers a messy debt default, or Italy and Spain face extended punitive interest rates, this could lead to an extended serious recession in the euro zone.

q Is the UK economy expected to recover this year?

a Ms Redwood: We expect the UK economy to slide back into recession in 2012 and expect a contraction in GDP in the year overall of about 0.5 per cent. This partly reflects the UK's links with the euro zone, but also reflects its own austerity programmes and the deteriorating labour market.

q Will unemployment peak this year?

a Ms Redwood: There can be fairly long time lags between the economy and the labour market. So if the economy performs poorly this year, it might not be until 2013 or even 2014 that unemployment peaks. We expect unemployment to rise to about 3.3 million from its current level of 2.6m.

q What are the prospects for house prices in the UK this year?

a Ms Redwood: The housing market has been surprisingly resilient, but it still looks overvalued. With credit conditions tightening and unemployment rising, we expect house prices to fall by about 5 per cent this year.

q What economic surprises do you think we should be prepared for in 2012?

a Ms Redwood: The big uncertainty is what happens in the euro zone. There is a huge range of possible outcomes, from complete meltdown to an orderly resolution of the crisis.