Analysis-Europe's problems are far bigger than a shallow recession

investing.com:

By Balazs Koranyi

FRANKFURT (Reuters) — The euro zone appears to be in the middle of another recession but worries about whether definitive growth figures due early next year will have a plus or minus sign in front are missing the bigger picture.

The good news is that the 20-nation currency union is set to avoid a deep contraction that could scar firms, households and banks for years. The bad news is that growth is hovering around zero with little out there to fuel a meaningful recovery.

Economic headwinds are so strong that next year will also be challenging and fading growth potential suggests the euro zone would struggle to expand much more than 1% even with a robust rebound.

Deep structural problems mean Europe is bound to trail most other big economic areas for years to come.

NEAR TERM

The short term outlook is not great — but not terrible.

Data on Tuesday showed gross domestic product shrank 0.1% in July-September from the previous three months, pointing to a shallow recession, if a weak fourth quarter follows as early indicators suggest.

But growth has been broadly flat all year and record-high interest rates — a byproduct of the inflation surge — along with tighter budget spending will limit expansion to just 0.6% next year, according to a Reuters poll.

Optimists, including the European Central Bank's chief economist Philip Lane, say that demand should recover as workers are now enjoying a rebound in real wages that will boost confidence.

The labour market remains tight and the world economy is rebounding, so external demand is also likely to be healthier.

But others say there is little to suggest the sort of rebound in confidence the ECB is banking on, citing high borrowing costs that hold back