The talk of impending global recession, as a result of the Euro Zone’s financial crisis, has been rubbished by a senior economist of UBS, a leading investment bank.

“Global recession is the least likely outcome of the current situation. We are going to have a few years of poor growth, growth which is at or below trend,” said Paul Donovan, managing director, global economics, UBS, speaking to journalists in Bahrain.

Global growth will average around 3.2 per cent compared to earlier forecast 3.7 per cent. Euro zone is likely to grow by 1 per cent versus 1.6 per cent; the US 2.2 per cent against a trend of 2.7 per cent, he said.

“There is a slow process of deleveraging in the US and Europe, where households and companies, particularly small companies, are reducing their debt to income or debt to GDP levels. They are growing their way out of debt. It is a slow process and while this is going on, it is very difficult to get above trend growth,” said Donovan.

“The risk scenario to this base case of OK but not strong growth is not recession, but we go straight past recession into a depression,” he said. “However, there is no need to be too negative. Policy is more than capable of preventing us from going into a depression,” he said.

“The talk of recession some of our competitors have come up is absolute nonsense.  It is just not possible where we are today. The base case of mediocre growth is actually well supported,” he said.

“I am not saying there is zero chance of depression, there is may be 5 per cent chance. But we do have the capability to stop ourselves going over the edge of the cliff.”

He said Greece is in depression today because of its wrong monetary policy and the country should never have joined the euro single currency. However, in the Euro zone as a whole, monetary policy is appropriate, banks are being provided with liquidity and the banking system is safe, said Donovan.

He said not too much should be read into the negative sentiment numbers coming from the US. “Bank lending is positive in the country, American consumers are spending and the hard data is actually good. There are no job losses and if you have a job, life is good.”

For the Euro zone things are a little bit different. The negative sentiment is longer lasting and this is feeding back into the real economy with banks tightening lending conditions, he said.

Donovan said the Euro zone crisis has two outcomes. “The fundamental problem for euro is that it is not working, euro has never worked.  No monetary union has ever survived without fiscal union alongside.  We are suggesting that a medium term outcome for the Euro zone is a binary set of possibilities.

“The first one is the setting up of a fiscal confederation or union which allows some amount of fund transfer between states. This requires integration and will take more than five years , but that is something we need to be moving towards,” he said.

“The alternative is the break-up of the euro. This is something so horrendous in terms of its consequences and we have to ascribe low probability to this. The economic consequence of a break-up is so severe that it could end up in social disorder,” he said.- TradeArabia News Service