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Worst-Case Economic Scenarios Will Be Avoided This Year: Mark Dow

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Recent weak economic data in Asia, due in large part to the slowing European economy, has heightened concerns for a looming recession in the region (and the rest of the world).

Japan's economy grew much slower than expected in the second quarter, the Japanese government reported Monday. The country's GDP grew 1.4 percent last quarter versus expectations for a 2.5 percent increase. In the first quarter, Japan's economy grew at a much more rapid clip of 5.5 percent.

This news follows on the heels of China's depressed exports data last week. The Chinese government reported only a 1 percent increase in export growth for July, down 10 percent from a year ago.

Mark Dow, former policy economist for the IMF and the U.S. Treasury, doubts that Asia is headed toward a recession.

"Asia shouldn't fall into recession but the slowdown should be meaningful and China is the epicenter of that," says Dow, adding, "China's economy is the reverse of firing on all cylinders."

After a decade of double-digit growth, China reported GDP just over 7.5 percent in the second quarter even as domestic demand rose. To help bolster economic growth, Dow says China should undergo another round of major stimulus spending similar to its $600 billion stimulus package in 2008.

"They will prop the economy up to some degree but just not enough to get it back to the rip-roaring state that we have become accustomed to," he says. "[Therefore] I think they slow down but I don't think they fall off a cliff."

The European economy on the other hand has already fallen off a cliff. While Germany, France and the Netherlands posted less than one percent of growth in the second quarter, the euro area as a whole contracted 0.2 percent in the quarter ending in June.

"Europe is in a recession and will stay in a recession for the foreseeable future," says Dow, also the author of the Behavioral Macro blog. "There is very little that can resuscitate them and get them back to a growth path while deleveraging is still going on."

On Monday, Greece reported its economy contracted 6.2 percent in the second quarter. Germany's Angela Merkel said Germany won't move forward with any additional monetary support for Greece until she reviews a new report on Greece's fiscal progress, which will be published in September. According to Michael Fuchs, a member of Merkel's parliamentary party, "Even if the glass is half full, that won't be sufficient for a new aid package. Germany cannot and will not agree to that. We reached the point where the Greeks must show they are capable of delivering a shift long ago."

In an interview with The Daily Ticker in December, Dow predicted 2012 would not be a banner year for global growth, financial assets and commodities. Aside from stocks, which have done relatively well despite European headwinds, his forecast is on target. He also sees lots of opportunities for investors in the current market.

Whatever the outcome in Greece, fears of spiller-over effects from a potential Greek meltdown are over blown, he notes. He firmly believes there is no risk for contagion or a Lehman-like event.

"As Germany gets more involved deeper and deeper and deeper into the European problem more of the toxic assets are migrating from the balance sheet of the private to the balance sheet of the official sector," he says, adding that during the Lehman crisis in 2008 many investors and banks were long toxic assets, which led to a lot of forced selling. As a result, he says the crisis in Europe is actually bullish for stocks.

Dow's bottom line: While this year will be bad, Dow believes the worst-case scenarios will be avoided.