Europe's Economy Shrinks as Investment, Spending Fall
Europe's economy contracted in the second quarter as company investment and consumer spending declined, putting the region on the brink of a recession. Gross domestic product fell 0.2 percent from the previous quarter, the European Union statistics office in Luxembourg said today, confirming a Sept. 3 estimate. Corporate investment dropped 1 percent and household spending declined 0.2 percent.
The outlook for the European economy has continued to deteriorate in the current quarter, with manufacturing and services contracting and confidence dropping to a seven-year low. Coupled with the worsening credit squeeze, which has prompted rescues for banks in countries including the U.K., Spain, Belgium and Germany, economists say the European Central Bank may now cut interest rates as soon as next month.
“Since the end of quarter, we've had a lot of data and all the surveys indicate the third quarter was poor,'' said Gareth Claase, an economist at Royal Bank of Scotland Plc in London. “And now the outlook looks even worse and there is no reason to be optimistic.''
Europe's manufacturing and services industries contracted for a fourth month in September and confidence in the economic outlook fell to the lowest since the wake of the Sept. 11 terrorist attacks. General Motors Corp.'s European unit plans to reduce production by about 40,000 vehicles by the end of the year, the company said yesterday. Renault SA, France's second- largest automaker, is planning to cut around 4,000 jobs.
Lending Rate
While the ECB left its key lending rate unchanged on Oct. 2, President Jean-Claude Trichet said that inflation risks have diminished and that the Governing Council discussed lowering borrowing costs at its meeting as the credit crunch hampers economic growth. RBS, JPMorgan Chase & Co., Barclays Capital, BNP Paribas SA, Bank of America Corp. and Societe Generale all revised their rate-cut forecasts after the comments (pay day loan).
RBS economists said in a note today that the ECB may cut the benchmark rate by half a percentage point from the current level of 4.25 percent before its next policy meeting on Nov. 6.
“The situation in credit markets has continued to deteriorate despite relentless efforts by authorities globally to inject liquidity and propose innovative measures to kick- start lending,'' the economists said.
The U.K. government said today it will invest about 50 billion pounds ($87 billion) to prevent a collapse of the British banking system. Spain will spend as much as 50 billion euros to buy bank assets. The moves follow rescues of Amsterdam- and Brussels-based Fortis, Dexia SA, which is based in Brussels and Paris, and Hypo Real Estate Holding AG of Germany.
U.K. Plan
European stocks tumbled today as the U.K. plan failed to revive confidence in the financial system. The Dow Jones Stoxx 600 Index declined 5 percent as of 10:50 a.m. in London. Government bonds soared, with the yield on the two-year note dropping 18 basis points to 2.99 percent.
The quarterly contraction in the euro-area economy is the first since the introduction of the euro almost a decade ago. From a year earlier, the economy expanded by 1.4 percent.
The decline in company investment was less than the 1.2 percent drop initially estimated. Construction fell 1.8 percent, less than the 2.2 percent estimate. Construction surged 2.6 percent in the first quarter, when mild weather prompted companies to bring forward building projects.
Exports fell 0.2 percent, also less than estimated, while imports declined by 0.5 percent, compared with 0.4 percent reported on Sept. 3.
Filed under: finance by Wolf