Europe’s economy sinks to recession

Bloomberg

Europe'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 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said 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 U.S. and Asian economies also struggling, leaders from the world's largest nations were to meet in Washington Friday to discuss ways of limiting the impact of the slump.

"The downturn will probably be more painful than in the previous cycle," said Martin van Vliet, an economist at ING Group. "But we've seen some aggressive, unconventional steps by policy makers and with the lower euro and commodity prices this may set the scene for a gradual recovery from the end of next year."

From a year earlier, the euro-area economy expanded 0.7 percent in the third quarter.

Separate figures Friday showed that inflation in October eased to 3.2 percent from 3.6 percent in September. Energy-price inflation cooled from 13.5 percent to 9.6 percent.

The German economy, Europe's largest, contracted by 0.5 percent in the third quarter, confirming it has entered its worst recession in at least 12 years. 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.

Bucking the trend, French GDP expanded 0.1 percent from the second quarter, when it shrank 0.3 percent.

Multiple shocks
Europe 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 $147 a barrel in July. The cost of credit then surged globally after the September collapse of Lehman Brothers, forcing banks to cut lending to businesses and households and shattering demand for exports.

The U.S. economy, the world's largest, contracted 0.1 percent in the third quarter, after a fiscal stimulus package boosted it by 0.7 percent in the previous three months. The U.K. economy shrank 0.5 percent, marking the first decline in 16 years.

The ECB last week lowered its benchmark rate by a half-point to 3.25 percent. 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 Thursday. "Inflation expectations should come down fast and that will give the ECB room for additional expansionary measures."

Investors expect the ECB to lower its key rate by at least another half a percentage point at its next meeting Dec. 4. Fortis and Morgan Stanley economists revised their outlooks to show the ECB cutting to 2 percent next year. 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, 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 U.S. will resume in the second quarter of 2009.