Friday 14 November 2008

Euro zone sinks into first-ever recession

The 15 countries that use the euro are officially in a recession, the European Union said on Friday, as growth shrank for a second straight quarter because of the world financial crisis and sinking demand.

EU statistics published on Friday show the euro zone shrank by 0.2 per cent in both the third and second quarters compared to the quarter before. Two successive quarters of negative growth is the usual definition of a recession.

Two of the region's largest economies — Germany and Italy — are in recession, Eurostat said, while France narrowly escaped, growing just 0.1 per cent in the third quarter after shrinking in the second quarter.

The spending slowdown and tight credit conditions are starting to hurt: carmakers said Friday that sales are slumping even as euro-zone inflation calms from record highs. So far, euro economies have not seen the jobless rate surge — but the EU executive Commission estimates that it will rise steadily over coming months.

Business and consumer confidence figures show business and consumers are worried, with companies readying to make cutbacks and households trying to save more as they worry about job losses. Both are hurt by tighter credit conditions that raise the cost of borrowing money.

It is the first recession since the euro currency was launched in 1999, when the European Central Bank took control of interest rates. That is the major lever of economic growth because changing borrowing costs can stoke or cool growth.

The last major recession to hit European economies was in 1993 when each country controlled its own monetary policy and could react individually to economy problems.

Euro-zone nations face more trouble in acting alone now and must consult the EU executive before launching major programs to kickstart the economy with state subsidies.

Germany, the largest euro economy, shrank 0.5 per cent in the third quarter as its main source of growth — exports — dropped and it could no longer rely on household demand to power the economy. Italy was also down 0.5 per cent. Spain also shrank in the third quarter.

They join Ireland, in recession since growth dropped in the second quarter. Third quarter figures for Irish growth are not yet available.

Outside the euro area, EU members Estonia and Latvia — until recently part of the Baltic boom — are in recession.

Britain and Hungary also contracted in the third quarter, remaining a quarter short of official recession. British unemployment is rising, with telecommunications firm BT saying Thursday it would cut 10,000 jobs by March, and the country is bracing for a deep downturn amid a collapsed housing market.

The spending slowdown is hitting major purchases hard with car sales across Europe slumping by 14.5 per cent last month, EU carmakers said Friday. The European carmakers' association ACEA said car sales in October dropped for the sixth month in a row from a strong year in 2007.

Ireland and Spain — both suffering badly from the bursting of a housing bubble — saw dramatic falls with Irish sales halving and Spanish sales down 40 per cent. Europe's biggest car market, Germany, was down 8.2 per cent from weak sales a year ago. France was down 7.4 per cent, Britain dropped 23 per cent and Italy 18.9 per cent.

Fast-growing eastern European nations that had pulled in bumper sales are no longer doing so with overall sales in the 10 EU newcomer states down 3.3 per cent despite an increase in Poland.

Major manufacturers saw sales dive, with Volkswagen AG down 7.6 per cent, Peugeot Citroen 16.3 per cent, Ford Motor Co. 11.9 per cent, General Motors Co. 25.2 per cent, Renault 19.1 per cent, Daimler AG 16 per cent and Japan's Toyota was down 23.6 per cent.

But there is some good news for shoppers as plummeting oil prices brought yearly inflation down to 3.2 per cent in October, Eurostat said, confirming an Oct. 31 first estimate.

The rate of price increases has been gradually falling from a record high of 4 per cent in June and July but is still well above the European Central Bank's guideline of just under 2 per cent that it looks to when it considers hiking or lowering interest rates.

Source: ndtvprofit

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