London, 14 December 2011

Economist Intelligence Unit: key changes since November 11th 2011 - The eurozone summit in early December, which was a crucial test of credibility for European leaders, was a disappointment. The aggressive short-term actions required to stem market volatility, including more concerted intervention by the European Central Bank, did not materialise. The Economist Intelligence Unit maintains its view that a solution to the crisis will eventually take shape, but we continue to assign a 40% probability to a break-up of the eurozone as bond markets continue to pressure the larger economies, especially Italy.

- Most monthly economic indicators for the eurozone countries have begun to decline, especially in manufacturing, and the region may already be in a recession. We have therefore lowered our 2012 economic forecast for the eurozone, and expect the 17 countries in the single-currency area to contract as a group by 1.2%, down from our previous forecast of a 0.3% decline. We expect a tepid recovery in 2013, with growth of only 0.6%

- The next three months will be an especially critical period for the eurozone. Standard & Poor's, one of the major ratings agencies, placed virtually the entire euro area, including Germany and France, on negative credit watch in early December, which suggests at least a 50% chance of a ratings cut in the next 90 days. Separately, Italy faces large bond auctions in late January and early February, which will test the confidence of financial markets in Italy specifically and in the euro zone more broadly.

- China's economy has begun to slow, and the government has responded by reducing the reserve requirement for the country's banks. With a change in political leadership due in 2012, the authorities will be keen to maintain growth at a high level to ensure social stability, suggesting that further economic stimulus is on the cards. But policymakers' room for manoeuvre will be constrained by the consequences of the 2009 stimulus, namely a property bubble in the coastal cities, which is now deflating, and by a rise in non-performing loans.

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