Recession hits EU spending, exports

Bloomberg

European consumer spending and exports contracted the most in at least 14 years in the first quarter and investment slumped as the worst global recession in more than six decades prompted companies to cut output and jobs.

Gross domestic product shrank 2.5 percent from the fourth quarter, matching an initial estimate and the most since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said Wednesday. Household consumption contracted 0.5 percent, while exports dropped 8.1 percent and imports declined 7.2 percent, all the most since the series started in 1995. Investment spending fell 4.2 percent, after a 4.3 percent contraction in previous quarter that was also the sharpest since 1995.

Even with evidence building that the worst of the economic crisis may be over, euro-area unemployment has risen to a 10-year high as payrolls start to reflect the severity of the recession with companies from ThyssenKrupp to Air France-KLM Group firing workers. European Central Bank President Jean-Claude Trichet, who said on May 7 that he saw "tentative signs" of stabilization in the economy, will unveil the bank’s latest economic forecasts Thursday.

"The big danger is that if unemployment continues to rise, that’s going to limit recovery prospects," said Howard Archer, chief European economist at IHS Global Insight in London. "Even the fear of unemployment is going to cause consumers to be worried and hold back on spending."

Wednesday’s report showed that from a year earlier, the euro-area economy shrank 4.8 percent in the first quarter, compared with a 1.7 percent contraction in the previous three months. The statistics office had initially put the annual contraction at 4.6 percent.

Amid global concerns about deflation, euro-area producer prices fell 4.6 percent in April from the year-earlier month, the most since the data were first compiled in 1981, a separate report showed Wednesday.

The first global recession

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered more than $1.48 trillion of writedowns and credit losses at financial companies and sent the global economy into its first recession since World War II.

The ECB will probably hold its main interest rate at a record low of 1 percent Thursday, according to economists surveyed by Bloomberg, as it sets out the mechanisms for buying 60 billion euros ($86 billion) of covered bonds, low-risk securities backed by mortgages and public sector loans. ECB council member Ewald Nowotny said in a letter to Austrian hoteliers last week that the bank could expand the asset-purchase program beyond that, buying bonds or commercial paper.

The global economy will shrink 1.3 percent this year before expanding 1.9 percent in 2010, according to forecasts by the International Monetary Fund. Still, European economic confidence rose for a second month in May and the manufacturing industry contracted at the slowest pace since October. Investors have also grown more optimistic as the MSCI World Index is trading around seven-month highs.