Friday, November 14, 2008

Euro-zone economy falls into recession

The 15 countries that use the euro are officially in a recession, the European Union said Friday, as their economies shrank for a second straight quarter because of the world financial crisis and sinking demand.

EU statistics published Friday show the euro zone shrank by 0.2% in both the third and second quarters compared to the quarter before. Two successive quarters of negative growth is the usual definition of a recession.

From a year ago, the euro-zone grew 0.8% in the third quarter and 1.4% in the second.

The entire 27 countries of the EU have so far escaped recession thanks to growth in eastern Europe. But they shrank 0.2% in the third quarter after zero growth in the second quarter-on-quarter. From a year ago, third-quarter growth was 1.7% and second-quarter growth was 0.8%.

Two of the region's largest economies -- Germany and Italy -- are in recession, Eurostat said, while France narrowly escaped, growing just 0.1% in the third quarter after shrinking in the second quarter.

The spending slowdown and tight credit conditions are starting to hurt: carmakers said Friday that sales are slumping even as euro-zone inflation calms from record highs. So far, euro economies have not seen the jobless rate surge -- but the EU executive Commission estimates that it will rise steadily over coming months.

Business and consumer confidence figures show business and consumers are worried, with companies readying to make cutbacks and households trying to save more as they worry about job losses. Both are hurt by tighter credit conditions that raise the cost of borrowing money.

It is the first recession since the euro currency was launched in 1999, when the European Central Bank took control of interest rates. That is the major lever of economic growth because changing borrowing costs can stoke or cool growth.

"It will be the biggest recession since the '80s" and will last through to the first half of next year, said Christoph Weil, an economist with Commerzbank AG in Frankfurt. He expects the pickup to be triggered by rising global demand for European goods and a fall in the value of the euro currency.

The last major recession to hit European economies was in 1993 when each country controlled its own monetary policy and could react individually to economy problems. Euro-zone nations face more trouble in acting alone now and must consult the EU executive before launching major programs to kickstart the economy with state subsidies.
Countries in decline

Germany, the largest euro economy, shrank 0.5% in the third quarter as its main source of growth -- exports -- dropped and it could no longer rely on household demand to power the economy. Italy was also down 0.5%. Both now have two quarters of negative growth.

They join Ireland, in recession since growth dropped in the first and second quarters. Spain also shrank in the third quarter but is not yet officially in recession.

Outside the euro area, EU members Estonia and Latvia -- until recently part of the Baltic boom -- are in recession.

Britain and Hungary also contracted in the third quarter, remaining a quarter short of official recession. British unemployment is rising, with telecommunications firm BT saying Thursday it would cut 10,000 jobs by March, and the country is bracing for a deep downturn amid a collapsed housing market.

The spending slowdown is hitting major purchases hard with car sales across Europe slumping by 14.5% last month, EU carmakers said Friday. The European carmakers' association ACEA said car sales in October dropped for the sixth month in a row from a strong year in 2007.

Ireland and Spain -- both suffering badly from the bursting of a housing bubble -- saw dramatic falls with Irish sales halving and Spanish sales down 40%. Europe's biggest car market, Germany, was down 8.2% from weak sales a year ago. France was down 7.4%, Britain dropped 23% and Italy 18.9%.

Fast-growing eastern European nations that had pulled in bumper sales are no longer doing so with overall sales in the 10 EU newcomer states down 3.3%despite an increase in Poland.

But there is some good news for shoppers as plummeting oil prices brought yearly inflation down to 3.2% in October, Eurostat said, confirming an Oct. 31 first estimate.

The rate of price increases has been gradually falling from a record high of 4% in June and July but is still well above the European Central Bank's guideline of just under 2% that it looks to when it considers hiking or lowering interest rates.

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