Slump is official for euro nations
The 15 countries that use the euro are officially in a recession, the European Union said Friday, as their economies shrank for a second straight quarter under strain from the world financial crisis and sinking demand.
The euro zone economies shrank 0.2% in both the third and second quarters, further stoking expectations that the European Central Bank will cut interest rates to limit the economic damage. Two successive quarters of contraction is one common definition of a recession.
The spending slowdown and tight credit conditions have industry hurting across the continent. Carmakers, a major source of exports for Germany and other countries, said sales were slumping. Car sales in October fell 14.5% from the previous year, the sixth consecutive monthly decline, the ACEA industry association said.
The worry is that the sharp decrease in personal spending will push the jobless rate much higher in the months to come. So far, euro zone economies -- with 16% of world output and 319 million people -- have not seen unemployment surge, though the EU executive commission estimates that it will rise steadily over coming months.
“The euro zone is not immune to what’s going on in the world economy generally, and exporting nations, like Germany, are totally plugged in to the fortunes of the world economy,” said Neil Mackinnon, chief economist at ECU Group. “We’re in for a pretty severe economic slump.”
Markets are pricing in the likelihood of another half-point interest rate cut from the European Central Bank at its next rate-setting meeting in early December, but many analysts think that with inflation easing it should move more boldly and cut its benchmark rate a full percentage point, from the current 3.25% to 2.25%.
Cuts spur growth by reducing borrowing costs but can also make inflation worse.
This is the first such slump faced by the ECB since the euro was introduced in 1999 and it took over interest rates for the countries using the currency.
The EU confirmed that two of the euro zone’s largest economies -- Germany and Italy -- joined Ireland in recession after posting 0.5% declines in the third quarter, and that France narrowly escaped, having expanded 0.1% in the third quarter after shrinking in the second quarter.
Spain contracted a quarterly 0.2% in the third quarter and, because of its slumping housing market, is predicted by analysts to enter an official recession when the next quarterly figures are published in early 2009.
The last major recession to hit European economies was in 1993, when each country controlled its own monetary policy and could react individually to economic problems. Euro zone nations face more trouble in acting alone now and must consult with the EU executive before launching major programs to kick-start their individual economies with deficit spending and state subsidies.
