Now what’s next for the Eurozone?

Potential outcomes and impacts for business in 2012


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There have been a lot of dramatic developments in the Eurozone recently, and so we thought it would be timely to have a look at those developments so what they mean for the UK economy and for business. So with me today is Richard and Rachel from the Economics Team, and we will be discussing some of those key developments, so Richard just to start us off what is our latest view as to what is happening in the Eurozone?

Richard: Well it is very difficult to have a clear view at the moment because the key issue in the Eurozone is uncertainty and to reflect this we have just released our latest report on the likely scenarios we think could happen which cover a very broad range of possible outcomes going from a position where the authorities the monetary and risk authorities in the Eurozone put in further actions and actually manage to guide the area out of crisis right through to a situation where there is complete breakup of the Eurozone. And this uncertainty is actually having very real economic effects, we are seeing weak consumer spending as people choose to hoard money rather than spend it on goods and services. Businesses are choosing not to invest and combined with Government retrenchment pretty much across the whole of the area. This is having a very negative outlook on short term GDP and demand.

So what kind of implications for business with that kind of certainty have if we had some sort of breakup of the Eurozone Greece leaving for example?

Well we are advising clients at the moment that they need to think about and plan for extreme scenarios and scenarios of the type you mention Greece xxx or even a whole breakup of the Eurozone and kind of what this means in practice is companies should stress test their business to see which part is the most vulnerable so that sort of downturn. Where vulnerability is identified put in place contingency and mitigation plans to make sure they are least effected as they can be. And the other thing they need to bear in mind as well is that actually a breakup will affect all parts of their business from treasury to legal to operations so these plans really need to be holistic and cover a couple of whole organisation.

Pretty urgent as well given the current circumstances

Absolutely, absolutely.

So Rachel what does all this mean for the UK? We have seen this sort of chaos across the channel what does that actually mean for the UK economy first?

Well what goes on the Eurozone has a profound effect on the UK economy, firstly because we do a lot of trade with them, it is around 50% of our exports go to the Eurozone and also because our banking system is highly interlinked and to the Eurozone banking system. So in short if things look weak, things are uncertain in the Eurozone, in the UK that is bad what it means is for a start businesses who export experience lower demand, and secondly what it means is that businesses and consumers they find it difficult to borrow but also their confidence is sat and so they do not spend and they do not invest and actually we have kind of seen that being picked up in the data at the moment.

So there have been some reports about the UK going back into recession? So do we believe that is really happened, how do we assess the situation going forward in the UK?

Well clearly the official figures from the Office of National Statistics show two figures of negative growth, however it is going to take a while for us to really know what is going on. The Office of National Statistics does not get all of its data straightaway so what we might seem is that in the future those figures revised up, and particularly we think that might be the case because some of the other data such as the Purchasing Managers index and other indicators such as the labour market actually suggested that a recovery might be underway, however, in the common quarter because of the Jubilee and obviously an extra bank holiday and also because things are looking like they are fairly flat at the moment I would not expect a dramatic revision but it could be that we are not currently in recession.

So there might be some hope that later in this later and into next year we might still get a gradual recovery as long as we do not get one of the worse case scenarios in the Eurozone?

Absolutely I think definitely the data is indicating that certainly towards the latter end of the year we should see a pick up and into 2013 as well.

I am just summing up Richard what would be your one key message for business if you had to sum it up?

Well I think the key messages were in uncertain times, there is lots of different scenarios that could play out and it is fundamentally unknowable the way it will play out because it comes down to what policies are chosen, and what businesses and markets do to respond to those policies, so what you need to do at the moment is plan for different eventualities and make sure as far as possible you are insulated from the worse should it happen.

Rachel any messages particularly for the UK businesses?

I think just building on what Richard has said obviously you need to test against a range of scenarios. However you also have to look for the opportunities as well, I mean actually what we have seen for the first time is that the trade and with the rest of the world has been predominately outside of Europe and those businesses that can take advantage of growth in emerging markets are likely to do better as well.

OK so clearly there are many risks out there for the Eurozone and we sum that up in our latest scenarios paper which is available on our website so please go and have a look at that, but there are also opportunities out there for companies that could prepare well for those risks and look into some of the growth markets in the emerging economies. So please do come back to us with any queries on this and well obviously be continuing to analyse and monitor the situation over the coming weeks and months. Thank you.

John Hawksworth leads a discussion on the current Eurozone situation and provides an update on the four potential Eurozone scenarios highlighted in our December 2011 report ‘What next for the Eurozone? – Possible scenarios for 2012’ and their implications for business.

These ranged from an optimistic scenario - monetary expansion, fiscal transfers, restructuring leading to reasonable growth in 2012 - to more negative scenarios: further banking turmoil and a second credit crunch, Greece exiting the euro and the creation of a new smaller currency bloc.

Since December the most significant change affecting these scenarios since we published our December report is the downgrade to the most optimistic outcome (Scenario 1), which assumed the authorities put in place a credible policy package in the first half of 2012. We now know that this has not happened, and so we have had to amend this scenario to reflect a more gradual and less concerted policy response from the authorities The other three scenarios are very much still in the running. In fact Greek exit has gone from an outside chance to a significant possibility. The possible implications for businesses remain profound.

For further information on our euro scenarios please read our earlier paper below.

What next for Eurozone? Potential outcomes for 2012

Monetary expansion through a liquidity injection from the European Central Bank, orderly defaults for the most indebted countries, Greek exit and a new currency bloc have been outlined as four potential outcomes of the Eurozone crisis in 2012, in a PwC report launched today, "What next for the Eurozone - Possible scenarios for 2012". The report analyses each of these scenarios and outlines the outcomes of each in terms of the potential Eurozone inflation and GDP impact over the medium term.

Economic Views, Eurozone December 2011

For further consideration of the political and economic impact of these scenarios to the large European economies and a selection of other smaller economies, please see our Eurozone Economic Views report and webcast .