Saturday, November 15, 2008

Europe Tips Into Recession

--Euro Zone, 15 countries using euro, is in recession in 15 years even though european region as a whole is not in recession --Spain is weighed down by real estate bubble and high unemployment --Export relied Germany took hit by weakening demand of sapping developing countries --UK was hurt by slumping disappropritate financial service sector. Most of Europe officially fell into recession in the latest quarter as U.S. consumers and companies showed fresh signs of distress, according to data released Friday -- increasing the pressure on global leaders holding an emergency summit on the financial crisis this weekend in Washington. With third-quarter earnings reports wrapping up, the week coming up won't be as hectic in Europe. Also, looks like the U.K.'s holiday season isn't going to be such a train wreck after all. Aude Lagorce reports. (Nov. 14) The recession is the first for the euro zone -- the 15 countries that now use the euro currency -- since the shared currency was launched in late 1999. The combined economy of the countries, which rivals that of the U.S. in size, shrank 0.2% in the third quarter for its second straight quarter of decline. The euro-zone announcement came a day after Europe's biggest national economy and the world's fourth-largest, Germany, announced its own recession. Japan, the No. 2 economy, will disclose early Monday morning in Tokyo whether it has technically slid into recession or narrowly averted it. The Asian financial center of Hong Kong also announced Friday that it was in recession. Major global economic institutions in recent days have forecast a recession spreading across the world's developed countries in the coming months. The shared gloom will not necessarily translate into agreement this weekend among leaders of the so-called Group of 20 nations, where China, India, Brazil, Mexico, South Africa and other rising forces are meeting with traditional economic powerhouses including the U.S., Japan, Germany and the U.K. Most economists doubt the summit will yield any new rescue plans. Most of Europe's major countries are sliding for a number of different reasons. But much of the slump is traceable to the financial crisis that originated in the U.S., and which directly affected some European financial institutions that bought securities backed by shaky American home loans. As in the U.S., the resulting crunch on credit markets has made borrowing increasingly difficult, crimping spending and investment -- especially in credit-dependent sectors such as construction, automobile and retail -- and forcing companies to cut production. That in turn is reducing workers' ability to spend, which further hurts national economies and continues the downward cycle. In Europe's auto industry, new-car registrations fell 15% in October from the previous year to 1.13 million vehicles, in figures also announced Friday. Some European car makers are turning directly to governments for financial help, as in the U.S. On Friday, Opel asked the German government to give it a helping hand, saying it could no longer rely on financial support from its U.S. parent, General Motors Corp. Many economists say the situation is unlikely to improve before 2010. "It's just the beginning," Bank of America economist Gilles Moec said in a research note on Friday. "The full impact... has yet to be felt on corporate investment." The U.S. economy also is widely believed to be falling into recession, though numbers to confirm whether that is the case won't come until January. The nation's GDP contracted at an annual rate of 0.3% in the third quarter. Friday figures showed retail sales declined 2.8% in October, the biggest drop since 1992, as consumers hit by declining home equity and job losses are feeling the pinch. U.S. retailers are bracing for what most economists predict will be a dismal holiday shopping season. Citigroup was expected to issue as many as 10,000 pink slips this week, while Fidelity Investments told workers Friday to prepare for more 1,700 layoffs after dismissing 1,300 employees on Wednesday. Home-loan giant Freddie Mac said it would be forced to request an infusion from the U.S. Treasury on Friday, unable to stem recent losses. The European Union as a whole -- 27 countries in all, 12 of them using local currencies -- is not technically in recession, although it shrank in the third quarter. Growth was flat in the previous quarter. Three big economies, the U.K., Spain and France, have had only one quarter of contraction so far this year, though they remain in danger of falling further. In the emerging markets of Eastern Europe, the picture is mixed, but many countries are experiencing sharp slowdowns. Hungary reported its economy shrinking by 0.1% in the third quarter, particularly painful for a developing country that depends on high levels of growth. View Full Image Europe's biggest stock markets gained small amounts on Friday, despite the negative data releases. However, they all lost ground over the week as a whole. Germany's DAX index fell 5% during the week to close at 4710.24 points. The three-month dollar London interbank offered rate, known as Libor, rose for the second straight day on Friday, when it rose to 2.24% from 2.15%, reversing a recent trend that was gradually easing credit problems. Analysts attributed the rise to new uncertainties over how the U.S. Treasury would spend the $700 billion available to it in the government's credit rescue plan. Individual countries have produced waves of bad data this past week. On Friday, Italy announced its economy had shrunk 0.5% in the third quarter, a second straight quarter of contraction, while Spain announced its first quarter of contraction since 1993. France's economy grew just 0.1%. European economies are being hit by the financial crisis in different ways. Spain expanded rapidly in the past 15 years thanks to a combination of large fund transfers from the EU, which helped finance transportation and energy infrastructure, and easy access to housing and consumer loans, which helped fuel a real-estate boom. Now, however, banks are lending less, leaving 1.5 million new homes empty and preventing consumers from financing purchases of big items such as cars. The downturn has caused a spike in unemployment: in October, nearly 200,000 people registered as jobless in Spain, almost as many as in the U.S., where the working population is eight times as large. "Spain is now clearly running out of steam and it's hard to see what could help restart the engine," said BNP Paribas economist Philippe Sabuco. In Germany, both companies and households had been careful not to borrow too much. But the financial crisis has hurt the economies of developing nations, who are now demanding less of Germany's specialty product, high-quality tooling equipment. Germany is highly dependent on the performance of its export machine, which boasted 103 billion euros of trade surplus in the first half of 2008, and could get hit badly if countries such as China expand more slowly. The U.K., which is part of the European Union but does not use the euro currency, has been more directly affected by the financial crisis, as the credit crunch harmed the country's large financial-services industry, its main growth engine. GDP contracted 0.5% in the third quarter, the first negative quarter in 16 years. At the G-20 meeting in Washington, Europeans say they want radical changes, such as a global regulator to ensure the soundness of the world banking system and prevent excessive risk-taking of the sort that led to the current credit shortage and recession. U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy -- both eager to bolster their own leadership credentials -- lobbied hard for the G-20 summit, and Mr. Sarkozy has called for concrete actions within 100 days. The U.S. view, by contrast, is "let's put out the fire first and later we'll focus on redesigning the fire hoses," said John Kirton, director of the G-20 Research Group at the University of Toronto. President George W. Bush is deeply suspicious of Europe's far-reaching proposals. His successor, President-elect Barack Obama, has signaled clearly that he won't insert himself into the G-20 talks, and hasn't indicated what kind of international regulatory changes he would support once he is sworn into office in January. Emerging nations, meanwhile, want greater clout in such global institutions as the International Monetary Fund and World Bank before they consider handing over regulation of their banks to an international body. The result is that this weekend's summit is far more likely to produce plans for future action than it is action itself. Leaders might endorse public spending programs as a way to restart stalled economies, but most of the big countries, including the U.S. and China, either have already announced their own fiscal stimulus packages or are on their own paths toward doing so. "If they don't have some concrete actions, it will certainly be regarded as a failure," Mr. Kirton said of the G-20 meeting.

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