Eurozone contracts at record pace in Q1

Bloomberg

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Europe’s economy contracted at a record pace in the first quarter as companies cut output and jobs to survive the worst global slump in more than six decades.

Gross domestic product in the 16-member euro region dropped 2.5 percent from the fourth quarter, when it fell 1.6 percent, the European Union’s statistics office in Luxembourg said Friday. That’s the biggest drop since the euro-area GDP data were first compiled in 1995 and exceeded the 2 percent decline economists expected in a Bloomberg News survey. Inflation held at 0.6 percent in April, a separate report showed.

The deepest global recession since World War II is curbing European exports and eroding consumer demand, forcing companies to cut spending and jobs. The German and Italian economies also shrank by the most on record in the first quarter, data from those nations showed Friday. Hong Kong’s economy contracted by the most since at least 1990, prompting the government to forecast a full-year contraction of as much as 6.5 percent.

"The first quarter will hopefully remain the weakest overall," said Christoph Weil, an economist at Commerzbank in Frankfurt. "The economy may continue to shrink through the third before we see some kind of stabilization."

From a year earlier, the euro-area economy shrank 4.6 percent, also the biggest drop on record, Friday's report showed. The statistics office is scheduled to publish a breakdown of first-quarter GDP on June 3. The European Commission on May 4 cut its outlook to project a contraction of 4 percent this year and 0.1 percent in 2010.

In Germany, Europe’s largest economy, GDP dropped 3.8 percent in the first quarter from the previous three months. That’s the biggest drop since data were first compiled in 1970. Italian GDP fell 2.4 percent, the most since records began in 1980, and the French economy shrank 1.2 percent in that period. The economies of the Netherlands and Austria also contracted.

While policymakers have expressed optimism that the global recession may be easing, recent reports indicate any recovery is likely to be slow. The world economy will shrink 1.3 percent this year and only return to growth in 2010, the International Monetary Fund forecasts.

Bank of England Governor Mervyn King said on May 13 that the U.K.’s recovery will be "slow and protracted." In the U.S., rising unemployment may restrain consumer spending, the biggest part of the economy.

In Japan, machinery orders fell 1.3 percent in March, a sign that managers remain wary of upgrading factories and equipment before a recovery takes hold. Japan next week may say its economy shrank a record 4.3 percent in the first quarter from the fourth, according to a survey of economists. Munich-based Bayerische Motoren Werke, the world’s largest luxury-car maker, is among companies cutting jobs and curtailing production to weather a drop in demand. In April, vehicle sales of the BMW brand dropped about 23 percent, Chief Executive Officer Norbert Reithofer said on May 6.

"It’s too early to sound the all-clear," Reithofer said that day. "We don’t anticipate a stable recovery before 2010."

Industrywide European car sales fell 12 percent in April led by BMW, Daimler and Toyota Motor, the Brussels- based European Automobile Manufacturers’ Association said Thursday. It was the 12th straight monthly decline.

As the global slump curbs orders and rising unemployment undermines consumer spending, companies are being forced to hold the line on prices. Euro-region producer prices declined 3.1 percent in March from a year earlier, the biggest drop in 22 years. Consumer-price inflation is less than half the ECB’s aim of just below 2 percent, and an EU gauge of price expectations turned negative last month for the first time since 1990.

While declining prices leave consumers with more money to spend, companies may not be able to count on household demand to bolster earnings this year. The commission earlier this month forecast unemployment will jump to 11.5 percent next year with the highest rates expected in Spain and Ireland. The region’s jobless rate is currently at 8.9 percent, a three-year high.