Economic slump deepening, Brussels observes

Bloomberg

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The economy of the 16 countries sharing the euro will shrink 1.9 percent this year, the Brussels-based commission said yesterday, revising a November estimate for growth of 0.1 percent. The forecast is bigger than the 0.5 percent contraction predicted by the European Central Bank last month.

The ECB last week reduced interest rates to match the lowest since the euro’s launch in 1999 to tackle a recession that may see 11 of the euro-area economies shrink this year. Germany, France and Spain have orchestrated bank rescues and fiscal-stimulus packages to bolster their economies.

"The measures to stabilize the financial market, the easing of monetary policies and the economic-recovery plans will enable us to put a floor under the deterioration of the economy," EU Monetary Affairs Commissioner Joaquin Almunia said in a statement. They will "create the conditions for a gradual recovery in the second part of 2009."

The slump deepened in the fourth quarter, according to the commission, which estimates that gross domestic product shrank by 1.5 percent in the final three months of the year after a 0.2 percent contraction in the previous two quarters. The economy will also contract in the first two quarters of 2009, it said.

The ECB has offered additional funds to banks as they nurse losses from the global financial crisis. German Chancellor Angela Merkel this month planned a second stimulus plan of as much as 50 billion euros ($66 billion) that includes tax cuts and aid to the country’s automobile industry. France has approved a 26 billion- euro stimulus program.

The euro area will return to growth next year, yesterday’s forecasts show. The economy of the 27 countries in the European Union will shrink 1.8 percent this year, according to the commission.