EU Cuts Growth Forecasts, Sees Recession in Germany

By Fergal O'Brien

Sept. 10 (Bloomberg) -- The European Commission cut its growth outlook for the euro area for the rest of this year and predicted a recession for Germany, the region's largest economy.

The 15-nation euro region's economy will probably stagnate this quarter after shrinking in the previous three months for the first time since the euro was introduced in 1999, the Brussels-based commission said today. The commission lowered its full-year growth forecast to 1.3 percent, from 1.7 percent earlier, and signaled the 2009 outlook may also be cut.

With recessions forecast for Germany and Spain, Jean-Claude Juncker, who leads a group of euro-area finance ministers, today said there is a ``risk of a technical recession'' for the euro area as a whole. The region's manufacturing and services industries contracted in August and confidence fell to the lowest in more than five years. The EU also forecast a recession in the U.K., which is outside the euro area.

``We expect economic activity to be essentially stagnant across the region in the second half of 2008,'' said Howard Archer, chief European economist at Global Insight in London. He sees growth slowing to 0.8 percent next year from 1.2 percent this year.

The EU forecast the euro-area economy will expand 0.1 percent in the final three months of 2008 after an estimate of no growth this quarter. Both projections are down from earlier forecasts of 0.4 percent growth for both periods. The German economy will probably shrink 0.2 percent in the current quarter after contracting 0.5 percent in the previous three months, and Spain's economy will also shrink in the third and fourth quarters, according to today's projections.

`Contracting Slightly'

Outside the euro area, the commission sees U.K. output ``contracting slightly'' in the second half of the year.

``Economic activity has slowed down considerably'' in recent months, Juncker, who is Luxembourg's premier and finance minister, said in Brussels today. A technical recession is defined as two consecutive quarters of economic contraction.

While the commission raised its inflation forecast for 2008 to 3.6 percent from 3.1 percent, it said consumer-price growth ``may be at a turning point'' after oil prices fell from a record and as past increases in food and energy costs ``gradually fade in the coming months.'' The recent declines in commodity prices and the euro also ``have provided some relief,'' Almunia said.

Oil Prices

Since reaching a record $1.6038 against the dollar on July 15, the currency has dropped around 12 percent. Oil prices have fallen almost 30 percent in the last two months to $103.84 a barrel. The euro slipped 0.1 percent to $1.4115 as of 1:44 p.m. in London. Bonds fell, with the yield on the 10-year bund, Europe's benchmark government security, increasing 5 basis points to 4.09 percent.

Still, the euro's advance over the past year and the surge in energy prices have already taken a toll. Paris-based L'Oreal SA, the world's largest cosmetics maker, on Aug. 29 reported the slowest profit growth in three years. Stora Enso Oyj and UPM- Kymmene Oyj, Europe's largest papermakers, today said they will close unprofitable production lines as raw-material and energy costs have outpaced their ability to raise prices.

Banks including Amsterdam- and Brussels-based Fortis and Irish Life & Permanent Plc of Ireland have suffered due to writedowns, losses or increased funding costs related to the credit crisis. Credit Agricole SA, France's third-largest bank, today said it will eliminate about 500 jobs at its Calyon corporate- and investment-banking unit to rein in costs following three consecutive quarterly losses.

`Marked Deceleration'

``The continuation of the turmoil in the financial markets one year on, the near doubling of energy prices over the same period and the correction in some housing markets have had an impact on the economy,'' Economic and Monetary Affairs Commissioner Joaquin Almunia said in today's report.

The commission said it expects a ``marked deceleration'' in most Asian economies and predicts the effect of a U.S. tax rebate that boosted second-quarter growth there will fade.

The ECB last week lowered its euro-region growth outlook and raised its inflation projections for this year and next. ECB President Jean-Claude Trichet said today in Brussels that inflation ``is likely to remain high for quite some time, moderating only gradually during the course of 2009.''

Some companies have tried to offset falling European and U.S. orders by expanding in Asia and oil-exporting countries. Volkswagen AG, Europe's biggest carmaker, on Sept. 8 said emerging markets will provide the fastest growth in worldwide sales over the next 10 years, led by economic expansion in Asia and Russia.

``The deceleration of growth will gain momentum in the second part of the year,'' Almunia said. ``The way the European economies will start'' next year ``will not be very good.''

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