Europe Economy Unexpectedly Stalled in Fourth Quarter (Update3)

By Simone Meier


April 7 (Bloomberg) -- Europe’s economy unexpectedly stagnated in the fourth quarter as companies cut spending more than previously estimated.



Gross domestic product in the 16-nation euro region remained unchanged compared with the third quarter, when it rose 0.4 percent, the European Union’s statistics office in Luxembourg said today. It had previously reported a fourth- quarter expansion of 0.1 percent. Corporate investment dropped 1.3 percent instead of the 0.8 percent estimated earlier.



The European economy is now showing signs of rebounding from its end-of-year relapse as the global recovery prompts companies to step up investment and offsets some concerns that Greece’s fiscal crisis will hurt the euro region. While unemployment is at an 11-year high, economic confidence improved in March and the region’s services and manufacturing growth accelerated to the fastest pace since August 2007.



“The first quarter was still be very weak followed by an economic rebound in current three-month period,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “Exports will continue to drive an expansion this year.”



The euro was little changed after the GDP release, trading at $1.3353 at 1:11 p.m. in Frankfurt, down 0.3 percent on the day. The yield on the German 10-year benchmark bond dropped 0.3 basis points to 3.11 percent.



Idled Mines



Euro-area exports increased 1.9 percent in the fourth quarter from the previous three months, more than the 1.7 percent gain estimated earlier, today’s report showed. Household consumption was unchanged in the latest quarter, and government spending declined 0.1 percent after rising 0.7 percent in the previous period.



Solvay SA, the world’s biggest soda-ash maker, reduced capital spending by 57 percent last year to the lowest amount in five years. Nyrstar NV, the largest zinc producer, lowered its capital spending by 41 percent in 2009 and plans a 60 percent increase this year as it moves to restart operations at idled mines.



Asian economies are leading a worldwide recovery from the worst slump since World War II. The International Monetary Fund forecasts the global economy will grow 3.9 percent this year after a 0.8 percent contraction in 2009, with China expanding 10 percent, almost five times the pace projected for the U.S. The euro-area economy may grow 1 percent, the IMF forecast.



Data “point to a continued recovery of the world economy, albeit at variable speeds across countries and regions,” the Organization for Economic Cooperation and Development said in a report today. “A number of factors are expected to bear down on activity in the very near term.”



Largest Economies



Germany, France and Italy, the euro area’s three largest economies, probably expanded 0.9 percent in the first three months of 2010 and may grow 1.9 percent in the current quarter, the Paris-based OECD said. The U.S. economy probably grew 2.4 percent in the first quarter, it estimates.



Hochtief AG, Germany’s largest builder, on March 25 forecast further earnings growth this year after surging Asian demand boosted orders in 2009. Munich-based Bayerische Motoren Werke AG, the world’s largest maker of luxury vehicles, last month forecast a “strong double-digit” percentage gain in Chinese sales this year.



Europe will see “a slow and bumpy recovery,” said Colin Ellis, an economist at Daiwa Capital Markets Europe Ltd. in London. “The euro area is set to rely disproportionally on trade this year and next.”



Price Cuts



In Germany, an increase in foreign demand for basic goods and machinery countered a drop in the domestic market as factory orders held steady in February after a surge in the prior month, data showed today.



To help shore up earnings, companies have continued to cut prices and eliminate jobs, pushing unemployment to 10 percent, the highest since 1998. Euro-area producer prices fell 0.5 percent in February from a year earlier after declining 1.1 percent in January, a separate report showed today.



The European Central Bank will probably keep its benchmark interest rate at a record low 1 percent tomorrow, according to all 62 economists in a Bloomberg News survey. The ECB, which has started to phase out some of the stimulus measures introduced to fight the recession, will announce its decision at 1:45 p.m. in Frankfurt.



From a year earlier, euro-area GDP declined a seasonally adjusted 2.2 percent in the fourth quarter instead of a previously reported 2.1 percent, the statistics office said. For the full year, the economy contracted 4.1 percent after expanding 0.6 percent in 2008.



The euro was little changed after the GDP release, trading at $1.3353 at 1:11 p.m. in Frankfurt, down 0.3 percent on the day. The yield on the German 10-year benchmark bond dropped 0.3 basis points to 3.11 percent.



To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net