By Lexi Metherell and staff Updated January 23, 2012 19:55:28
Video: Economists predict 50-50 chance of EU meltdown (7pm TV News NSW)
Photo: Deloitte expects Europe's debt problems to weigh on parts of the Australian economy. (Flickr: Images_of_Money)
The latest quarterly Business Outlook by Deloitte Access Economics forecasts that Europe will be the key to growth globally and locally this year.
The report, titled "Eurogeddon", warns that 2012 could easily bring a deep recession and widespread bank failures in Europe.
Deloitte Access Economics director Chris Richardson says there is a 50-50 chance that Europe will muddle through the crisis.
"If it doesn't then yes, Australia has something like a rerun of the global financial crisis - unemployment up, profits down, Government budget hit for six," Mr Richardson said.
"Probably not a recession; a technical recession, thanks to magnificent momentum in mining, but a tough time nonetheless."
Mr Richardson says the European Central Bank is containing the situation by pumping money to the banks in the form of discount loans.
"The money that Europe's central bank is pumping out is working very effectively as sticky tape," Mr Richardson said.
"It is going to the banks, but the banks in turn are passing indirectly some of it back to governments and that combination is holding Europe together."
But even if the sticky tape does hold, Deloitte still expects Europe's problems to weigh on parts of the Australian economy.
More finance jobs are likely to go, the unemployment rate is expected to rise to 5.5 per cent, and Mr Richardson, who describes Europe as a "seething cauldron of risk", says the effects already are being seen in workplaces around Australia.
"You're getting employers who are giving employees overtime rather than taking on new people," he said.
Video: Chris Richardson discusses Europe's debt woes (ABC News)
For the Australian economy, China is key.
Mr Richardson says it would react quickly to any implosion in Europe, but its coffers are not as full as they were during the global financial crisis.
"Europe is a bigger customer for China than the United States is, and there are risks about that," he said.
"At some stage China will have an ugly year and when they do it will be pretty bad news for Australia."
Westpac chief economist Bill Evans is more confident that China can withstand Europe's problems.
"China's very much a domestically driven economy," Mr Evans said.
"Whilst we're expecting that the growth in China in the first half of the year - mainly because of these domestic tightening policies - to be around about a 6.5 per cent momentum, I think by the second half of the year, it will be more like eight."
While Australian Government debt is relatively low, Mr Richardson is concerned that household debt as a proportion of GDP remains amongst the highest in the world.
"It is not something that I see as an immediate problem but yes, it remains an area of vulnerability for Australia if bank failures in Europe start to happen and credit tightens up once more," he said.
The Federal Government is still committed to achieving a surplus next year, but warns it will be tough.
Mr Richardson believes the Government must be prepared to ditch that ambition given the severity of Europe's debt woes.
"If Europe blows then the surplus is a goner, and so it should be," Mr Richardson said.
"Basically you should use the budget to help defend against the downturn, but even if Europe doesn't blow, it is getting hard to get the surplus."
All thoughts for Treasurer Wayne Swan to consider as he returns to work and begins putting together the budget.
Access report warns of 'Eurogeddon' - ABC News (Australian Broadcasting Corporation)
