According to the International Monetary Fund, the recession in Europe’s major economies is coming to an end. In its recent World Economic Outlook report, the IMF revised up its GDP estimate for the 16-country eurozone to 0.3% growth in 2010, following a sharp 4.2% contraction in 2009. The IMF’s new forecast represents a substantial shift from earlier surveys; in July it was still expecting European economic activity to contract by 0.3% in the coming year.

Private sector forecasts have also picked up in recent months. Markit Economics reports that the average economist expects 1% growth in the eurozone next year, up from earlier predictions of a 0.4% increase. However, according to Markit’s survey, Europe will lag the US (forecast 2.7% growth) and the UK (1.1%) in 2010.

So far, actual data releases paint a mixed picture.  

Last week, the Munich-based IFO institute said that its business climate index, based on a survey of 7,000 executives, rose to 91.9 from 91.3 in September, the highest reading since September last year. In France, consumer spending rose for the first time in three months in September.

In the UK, however, a 0.4% decline in third quarter GDP confounded forecasters when the figure was released last week – the consensus estimate of the City’s economists was for a 0.2% increase. The shrinkage means that the British economy has contracted for six quarters in a row, a record since data were first compiled in 1955.

According to Ben May, European economist at Capital Economics in London, the recovery in global trade next year should provide support for European economies, even if the recent rise in the value of the euro could put a dampener on things. Capital Economics expects European GDP to rise by 1.5% in 2010 and for the US economy to expand by 3%.

May notes that the fiscal and monetary stimulus in Europe is on a smaller scale than that in the US, although he adds that this may also mean a more predicable growth path. Capital Economics expects US growth to drop back in 2011 as high levels of consumer debt act as a burden on further expansion; in Europe, where imbalances are much smaller, it expects the 1.5% growth rate to continue for another year.

Keith Wade, chief economist at fund manager Schroders, also strikes a cautionary note with regard to the euro’s valuation. “A few months ago we were expecting Europe to be in the vanguard of the global recovery, but the strength of the currency is raising some concerns about a double dip,” notes Wade. “While economic releases are still quite good – last week’s IFO report in Germany, for example, showed businesses still expecting expansion – it’s important to remember that there are quite long lags in these surveys.”

In a blog posted last week on the Financial Times website, Professor Willem Buiter of the London School of Economics calls the euro “a currency on steroids” and argues that its strength is hurting the exporting and import-competing sectors of the euro area. Buiter goes on to claim that the policy stance of the European central bank is increasing the risk of persistent deflation. With year-on-year eurozone inflation having been in negative territory for a number of months now, Buiter believes the ECB should introduce a policy of negative interest rates.

“If the ECB persists in acting in a wilfully asymmetric manner (by favouring deflation over inflation), its cherished independence will be taken from it,” writes Buiter, predicting popular anger as unemployment and excess capacity continue to rise.

However, given that interest rates across the region have already been reduced dramatically, fiscal stimulus is on the menu for many European governments, which appear to have abandoned any hope of balancing their budgets.

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