Europe Sneezes, We Catch a Cold

| Fri Nov. 4, 2011 12:55 PM EDT

Real Time Economics reports on the latest forecast for Europe's economy:

J.P.Morgan was among the first European banks to forecast a euro zone recession, meaning two-straight quarter of economic contraction, back in September. It was supposed to be a modest one, with GDP falling just 0.8% from its peak.

It now looks like things will get even worse. “We now believe that the recession will be deeper and longer lasting, and we are making forecast changes to show a peak to trough move in the level of GDP of just over 1%, with the recession lasting through the third quarter of next year. The risks around this forecast are for a deeper and even longer lasting contraction,” the bank said in its latest research note.

Urk. I'm not even sure what kind of comment to offer on this. But it strikes me as unrealistic to think that Europe can fall into a recession — possibly a deep one — and the United States won't be seriously affected. I know we have an overhang of demand for cars and houses, and that's going to spur more spending, but a recession in Europe is going to affect jobs in America, which affects incomes in America, which means there's no money for cars and houses no matter how much overhang there is.

On the other hand, maybe there's a cheerier scenario (for America, not Europe). It's possible, I suppose, that a recession in Europe will drive down demand for oil, which in turn will lower the price of gasoline, which in turn might stimulate the U.S. economy more than Europe's recession hurts it. Somebody somewhere must have modeled this, right?

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