Europe Economy Probably Shrank for First Time Since Euro Debut

By Fergal O'Brien

Aug. 14 (Bloomberg) -- Europe's economy probably contracted in the second quarter for the first time since the launch of the euro almost a decade ago, a survey of economists shows.

Gross domestic product in the 15 nations that share the single currency shrank 0.2 percent from the first quarter, when it expanded 0.7 percent, according to the median estimate of 40 economists in a Bloomberg News survey. Germany's economy, the largest in the region, probably shrank the most since 1993, a separate survey shows.

European Central Bank President Jean-Claude Trichet said on Aug. 7 that growth will be ``particularly weak'' through the third quarter. Manufacturing and services industries shrank for a second month in July and confidence in Europe's economy is at the lowest level in almost 15 years.

``Even allowing for the correction after the strong first quarter, it could be even weaker than people expect,'' said Simon Barry, an economist at Ulster Bank Ltd. in Dublin. ``And the underlying weakness means the economy has considerably less momentum heading into the third quarter.''

Italy's economy, the third-biggest in the euro region, unexpectedly shrank in the April-June period, edging closer to a fourth recession in a decade, according to data published Aug. 8. GDP fell 0.3 percent, compared with economists' expectations for stagnation.

German Slump

German GDP probably shrank 0.8 percent in the three months through June, according to the median estimate of 41 economists in a Bloomberg survey, after expanding 1.5 percent in the previous quarter. In France and Spain, the pace of expansion also slowed in the second quarter, separate surveys show.

The German data will be published at 8 a.m. today, followed by France and Spain. The euro-area figures are scheduled to be released at 11 a.m.

An index measuring the economic climate in the region dropped to the lowest since 1993, the Munich-based Ifo institute said yesterday. Measures of both current conditions and expectations declined, according to Ifo's quarterly World Economic Survey.

Trichet, speaking last week after the ECB kept its benchmark rate at 4.25 percent, said the central bank has ``no bias'' on interest rates and he removed a reference from his introductory statement to ``moderate, ongoing growth.''

Orders Dry Up

German factory orders have fallen for the past seven months and dropped the most in a year in June, according to figures published last week. An index of European manufacturing and services activity fell to 47.8 last month from 49.3 in June, where below 50 indicates a decline. The level is ``consistent'' with zero economic growth, according to Barry at Ulster Bank.

As euro-area companies grapple with cooling orders, they are also contending with soaring costs for energy and raw materials and the euro's 9 percent advance against the dollar in the past year. European inflation quickened to 4.1 percent last month, more than twice the ECB's 2 percent limit, according to a first estimate published July 31. The final consumer-price data for July is also scheduled to be released at 11 a.m.

Diemen, Netherlands-based CSM NV, the world's largest supplier of ingredients to bakeries, yesterday said price increases will hurt sales in the U.S. and delayed a profitability goal. Italian washing-machine maker Indesit Co. said July 30 that 2008 earnings will be lower than last year's, citing the ``very strong effect of exchange rates.''

While crude oil has dropped more than $30 since hitting a record $147 a barrel last month, prices are still almost 60 percent higher than a year ago. The gloomier growth outlook, and the ECB's acknowledgement that growth may not pick up as early as it previously expected, has prompted investors to start to price in interest-rate reductions.

Rate Expectations

Yields on Eonia forward contracts, a widely used market gauge of interest-rate expectations, have fallen in the past month. The yield on the March contract dropped to 4.12 percent yesterday from 4.38 percent. The euro has dropped 6.2 percent against the dollar in the same period and fell below $1.50 this week for the first time in more than five months.

JPMorgan Chase & Co. yesterday lowered its forecast for economic growth and predicted the ECB will cut its benchmark rate three times next year to 3.5 percent, starting in the first quarter. It previously forecast the ECB would keep borrowing costs on hold through 2009.

The economy is facing ``stagnation or a low growth rut, similar to what happened in the region after the bursting of the equity bubble in 2000,'' said David Mackie, chief European economist at JPMorgan. ``The forecast now anticipates a reasonably extended period of growth below potential.''

To contact the reporters on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.