E urope's economy fell into its first recession in 15 years in the third quarter, paving the way for deeper cuts to interest rates and taxes amid the worst financial crisis since the Great Depression.
Gross domestic product in the 15 euro nations shrank 0.2 per cent from the previous three months, when it also contracted 0.2 per cent, the European Union's Luxembourg-based statistics office said on Friday. The two quarters of contraction — the result of this year's surges in the cost of credit, the euro and oil prices — mark the first recession since the single currency was introduced almost a decade ago.
Consumers and companies are feeling the pain as sales, profits and hiring deteriorate, forcing the European Central Bank to embark on the fastest round of rate cuts in its history and governments to line up fiscal-stimulus programs. With the US and Asian economies also struggling, leaders from the world's largest nations meet in Washington today to discuss ways of limiting the impact of the slump.
“The situation is likely to get worse before it gets better,” said Nick Kounis, an economist at Fortis in Amsterdam. “There will be no real recovery before 2010.” From a year earlier, the euro-area economy expanded 0.7 per cent in the third quarter. Both the quarterly and annual rates were in line with the median estimates of economists surveyed by Bloomberg News.
Separate figures on Friday showed that inflation in October eased to 3.2 per cent from 3.6 per cent in September, matching an initial estimate on October 31. Energy-price inflation cooled from 13.5 per cent to 9.6 per cent, the lowest since December.
The German economy, Europe's largest, contracted by a bigger-than-expected 0.5 per cent in the third quarter, confirming it has entered its worst recession in at least 12 years, its government said on Thursday.
Joining it and Ireland is Italy, which slipped into its fourth recession in less than a decade, while Spain's economy contracted for the first time in 15 years. Growth in the Netherlands stagnated for a second straight quarter fidence earlier in the year that the economy would dodge a recession even as the US faltered. The European Commission began the year predicting growth of 1.5 per cent in 2009, only to cut its forecast to just 0.1 per cent as the financial crisis escalated.
Other major economies may not be far behind the euro region as the International Monetary Fund predicts the worst global slump in almost three decades. The US economy, the world's largest, contracted 0.1 per cent in the third quarter, after a fiscal stimulus package boosted it by 0.7 per cent in the previous three months. The UK economy shrank 0.5 per cent, marking the first decline in 16 years.
The economy of the 15 nations using the euro is suffering from multiple shocks, including the euro’s rise to a record $1.60 in mid-summer, the strongest inflation in almost 16 years and oil’s jump to an unprecedented $147 a barrel in July. The cost of credit then surged globally after the September collapse of Lehman Brothers Holdings Inc, forcing banks to cut lending to businesses and households and shattering demand for euro-area exports from America to Hungary.
European car sales plunged almost 15 per cent in October, the sixth straight monthly decline, the European Automobile Manufacturers' Association said today. Bulgari SpA, the world's third-largest jeweler, today scrapped its forecast for increased 2008 profit as consumers curb purchases of its luxury products.
Holcim Ltd, the world's second-biggest cement maker, on November 12 said it would shut a factory in Spain as earnings decline. German chemicals supplier BASF SE and French tire maker Michelin & Cie also are cutting output and jobs.
“The financial crisis has arrived in the real economy,” BASF Chief Executive Officer Juergen Hambrecht said on Oct. 30. “It all has some kind of a flavor of a recessionary development.”
The ECB last week lowered its benchmark rate by a half- point to 3.25 per cent, the second such reduction within a month. Having raised rates as recently as July to combat inflation, policy makers are now signaling further cuts.
The euro region is already ''in recession,'' ECB council member Ewald Nowotny said yesterday in Brussels. ''Inflation expectations should come down fast and that will give the ECB room for additional expansionary measures.''
Investors expect the ECB will lower its key rate by at least another half a percentage point at its next meeting on December 4, Eonia forward contracts show. Economists at Fortis and Morgan Stanley this week revised their outlooks to show the ECB cutting to 2 per cent next year, while those at Deutsche Bank expect 1.5 per cent to be reached for the first time.
While the recent decline of the euro against the dollar and a halving in the price of oil from its peak may provide some strength to the economy, analysts warn the recession may persist for longer in Europe than in the U.S. because its policy makers have been slower to act than counterparts in Washington.
Thomas Mayer, chief European economist at Deutsche Bank, calls the ECB's July rate increase a “mistake” and estimates the region's fiscal easing will be half that of the U.S. He predicts expansion in the US will resume in the second quarter of 2009 and not until the final three months of the year in the euro region.
Recovery may also be delayed by debt-laden companies and labor laws that make it hard for payrolls to be cut. With its benchmark rate now the highest among the Group of Seven nations, inflation may still not retreat fast enough for the ECB, which seeks to keep it just below 2 per cent.
Governments also are looking to protect their economies and support among voters. German Chancellor Angela Merkel said she may expand her fiscal stimulus program from the 50 billion-euro ($62.6 billion) package endorsed by her Cabinet last week.
The response of governments may mark the first test of 2005 revisions to the Stability and Growth Pact, which caps deficits to 3 per cent of GDP unless growth undershoots forecasts. EU Monetary Affairs Commissioner Joaquin Almunia said on November 4 that “we agree on the need to use the flexibility” contained in the revised pact.
“Monetary policy is not as effective as in previous crises and that brings us to fiscal policy,” said Carsten Brzeski, an economist at ING Group in Belgium. “We might see a 180-degree turn in Europe’s approach on using fiscal policy if it's the last rescue anchor for the economy.”
