Economists may still be debating whether Europe is headed for a sharp slowdown or even a recession, but Steve Knott, who installs home heating systems in Barrow-in-Furness, a port town in northwest England once known for its iron mills, is convinced he already knows the answer.
Knott, 53, who runs Furness Heating Components, has cut his work force to 18 people from 25 and said business was tougher than he had ever seen it. “There’s a lot of competition, and people are just not building that many houses anymore,” Knott said.
Data released yesterday leaves little doubt that the European economy is losing momentum before most countries have even recovered to the level of output they had in 2008, when the recession hit.
But the larger question is whether an increasingly bitter brew of flagging output and a sovereign debt crisis — along with the market downturn — will create something more sinister than a mere slowdown, and lead more businesses to cut jobs and investment as Knott has.
In France, the second-largest economy in the European Union after Germany, growth came to a standstill in the three months through June, according to official figures. Meanwhile, industrial production in the 17-nation euro area fell 0.7 per cent in June compared with May, more than analysts had forecast.
Tomorrow, economists expect a report on euro area economic activity to show that gross domestic product slowed to 0.3 per cent in the second quarter, from 0.8 per cent in the first three months of the year.
If there is less economic growth, governments will collect less tax revenue. They will have more trouble paying their debts. That could make investors even more nervous and add to turmoil in the stock and bond markets, which will undercut business and consumer confidence, which will lead to yet slower growth, and so on.
“There is a real risk that there is a self-enforcing cycle under way here,” said Martin Lueck, an economist at UBS in Frankfurt.
Lueck says he believes the most likely prospect is less dire, but even his more optimistic view calls for a brief slowdown on the way to a “new normal” of weaker growth in Europe and the United States. And he acknowledged that, in 2008, many economists underestimated how quickly and severely the financial crisis would spill into the broader economy.
“We learned the hard way,” Lueck said. “The links between the financial world and the world economy are very strong.”
Another recession is already well under way in Greece and Portugal, while growth in countries like Spain, Italy and Britain has been very slow since last year. But now Germany, which has been remarkably strong, hauling the rest of the Continent along with it, seems to be decelerating. The Ifo Business Climate Index, considered a reliable predictor of German growth, fell in July as executives became less optimistic about exports.
“It is more than a soft patch,” said Eric Chaney, chief economist at a French insurer, the AXA Group. “The business cycle is really coming to a quasi-standstill in Europe.”
Worse-than-expected results from companies like Daimler, Deutsche Bank and Siemens in the last month have reinforced the feeling that Germany’s extraordinary boom is near an end. E.On, Germany’s largest utility, said on Wednesday that it might need to cut as many as 11,000 jobs after experiencing the first loss since it was created a decade ago from a group of state-owned utilities.
E.On attributed the loss chiefly to the government’s decision to force some of the company’s nuclear power plants to close early, but sales declines in foreign markets like Britain and Hungary also played a role.
Even companies that have done well are warning about risks ahead. “The coming months will be challenging for us,” Martin Winterkorn, the chief executive of Volkswagen, said in late July after the car maker reported that profit more than tripled, to ¤4.8 billion ($6.8 billion).
A big problem for Europe is that domestic demand is weak and growth has become primarily dependent on sales from abroad, where the signals are flashing yellow. The United States, still the largest foreign market for companies like BMW, is slowing and could slip into recession. The earthquake, tsunami and nuclear disaster in Japan had a greater impact on global trade than economists expected. And demand from China and emerging markets is slackening.
“Germany is so leveraged in global trade that if something happens, then Germany slows immediately,” Chaney said. “That makes the recovery more fragile. It depends on the good health of the rest of the world.”
Some German exporters are still smarting from the severe recession that followed the collapse of Lehman Brothers in 2008, and must now gird for another retrenchment. An association that represents makers of construction machinery said last Wednesday that it expected a sales increase of more than 10 per cent this year, but that sales were still one-third below their 2008 peak.
Many German companies are still not operating at capacity, while they worry about debt problems in the United States and Europe as well as unrest in the crucial Middle East market, said Christof Kemmann, chief executive of BHS-Sonthofen, a maker of machinery for processing building materials.
“Even when some sectors are reporting good numbers, there is no reason for euphoria,” Kemmann said.
And it looks increasingly unlikely that demand from home will recover in time to offset fading exports. Government austerity measures have cut into consumption in countries like Ireland and Italy, and the belt-tightening is spreading. President Nicolas Sarkozy of France, in attempt to reassure bond investors that the country can service its debt, last week told his budget and finance ministers to come up with new measures to cut the budget deficit to three per cent of gross domestic product by 2013, from a projected 5.7 per cent this year.
Terms of Spectrum Auction in Greece Rankle Operators (August 15, 2011) Britain, where unrest in the streets is only adding to uncertainty among consumers and businesses, provides a prime example.
Britain’s economy grew 0.2 percent in the second quarter, but disposable income in the 12-month period through March fell 2.7 percent for the average British family as a result of inflation and higher interest rates. As consumers avoid the stores, several retailers, including Jane Norman, a women’s fashion retailer; TJ Hughes, a discount department store; and the wine and spirits retailer Oddbins have been forced to seek bankruptcy protection.
Despite the risk of another recession, the British government has vowed to stick with its £80 billion ($130 billion) austerity program, which is expected to cost 300,000 public sector jobs.
“It’s pretty harsh times,” said Dave Knight, secretary for the Unison trade union, which represents workers for the Waltham Forest Council in the North of London, an area hit by unrest. Of four council offices, three will close, he said. A team of five psychologists who counseled troubled students will lose their jobs.
Many economists warn that the austerity measures could be counterproductive by making people fearful of unemployment and afraid to spend. “Austerity has become the problem, not the solution,” said Ian Harnett, a managing director at Absolute Strategy Research. “Me saving is great. You saving is great too. But if we all save it’s not good.”
For all the economic angst, many economists say that risk of a repeat of the 2008 financial crisis has been overblown. Banks have more capital in reserve than they did then, the argument goes, and central banks have shown they are ready to step in at the first hint of trouble. This month, signs of stress in the interbank lending market prompted the European Central Bank to expand cheap loans to banks in the euro area, to ensure that none run short of cash.
Further, some economists say, investors have a much better understanding of where the risks lie than they did in 2008, when no one knew which banks were sitting on heaps of bad assets. Under pressure from regulators, European banks disclosed their holdings of government debt last month. The abundance of information makes a panic less likely, these analysts argue.
“Global financial markets are not headed for a second meltdown,” Peter Morici, a professor at the University of Maryland and former chief economist at the United States International Trade Commission, said in a note. “But growth is going to be slow,” he added, “until Western leaders correct the imbalance in demand between Asia and the West, and work off all the debt.”
©2011 The New York
Times News Service
