EU Says Europe Economy Probably Already in Recession

By Fergal O'Brien

Nov. 3 (Bloomberg) -- The European Commission said the region's economy probably entered a recession this year and will stagnate in 2009, increasing pressure on political leaders to collaborate on measures to tackle the financial crisis.

Economic growth in the euro area will slump to 0.1 percent next year, the worst performance since 1993, the Brussels-based commission said today. It also estimated that gross domestic product will shrink for three consecutive quarters this year and cut its forecast for full-year 2008 growth to 1.2 percent from 1.3 percent previously.

Euro-area finance ministers meet today to try to overcome the worst financial crisis since the Great Depression. While France and Germany led European governments in committing a combined $1.7 trillion to protect the region's banks, and the European Central Bank now offers unlimited loans in an attempt to get credit moving, there has been no unified government response. Chancellor Angela Merkel last week proposed a 50 billion-euro ($64 billion) package to revive the German economy.

``A recession in 2009 seems now unavoidable,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. ``Today's new GDP forecast of 0.1 percent for 2009 by the European Commission still looks too optimistic to us.''

Economists at BNP Paribas and Citigroup Inc. also said the EU remains overly optimistic, with both predicting the euro area will shrink next year. The EU partly acknowledged this, saying its forecasts are subject to ``considerable uncertainty and downside risks.''

Record Pace

European manufacturing contracted at a record pace in October and faster than initially estimated, according to separate figures published today. Figures last week showed that executive and consumer confidence has dropped to a 15-year low.

Stocks and the euro pared gains after today's reports. The euro was at $1.2838 as of 13:43 a.m., compared with $1.2898 earlier, while the Dow Jones Stoxx 600 was up 0.3 percent at 222.66, paring an earlier gain of 1 percent.

European 10-year government bonds advanced, with the yield on the German bund, Europe's benchmark government security, falling 5 basis points to 3.84 percent.

The commission said GDP in the euro region will probably contract by 0.1 percent in both the third and fourth quarters after shrinking 0.2 percent in the second quarter, pushing the region into a recession, defined as two straight quarters of contraction.

Profit Forecast

Paris-based L'Oreal SA, the world's largest cosmetics maker, last week cut sales and profit forecast for the third time in less than four months. Deutsche Lufthansa AG, Europe's second-biggest airline, lowered its earnings forecast.

``The economic horizon has now significantly darkened,'' European Economic and Monetary Affairs Commissioner Joaquin Almunia said in today's report. ``We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector.''

Government measures to tackle the economic fallout from the credit crunch have so far been piecemeal, with governments including Italy, France and Germany planning their own tax breaks or stimulus packages. The EU in late October pledged to present a recovery plan this month and EU leaders are scheduled to meet this week to coordinate their position before a summit of world leaders hosted by President George W. Bush on Nov. 15.

French President Nicolas Sarkozy has been pushing for a unified action and that is ``a goal the president never gave up on,'' French Finance Minister Christine Lagarde said today in an interview. ``So I'm not going to give up on it either.''

Central Banks

In addition to flooding markets with cash, central banks across the world have also begun slashing interest rates to limit the economic impact of the financial crisis. The European Central Bank is set to cut its benchmark rate this week for the second time in less than a month after the U.S. Federal Reserve lowered its rate to match the lowest level in a half-century. Policy makers in Japan, India and Norway have also cut borrowing costs.

The Irish, Spanish and U.K. economies will all contract next year, while Germany, Europe's largest economy, France and Italy will stagnate. For 2010, the EU sees the overall euro-area economy expanding by 0.9 percent.

Coupled with the drop in oil prices, the slowdown will cool inflation, which may ease to 2.2 percent in 2009 from 3.5 percent this year, the EU said. It will also push the euro region's unemployment rate to 8.4 percent next year from 7.6 percent this year. EU countries' budget deficits are likely to widen, with the euro-area average forecast to increase to 1.8 percent next year, which would be the biggest since 2005.

Growth is ``at a standstill'' in many European economies, Almunia said. ``The economic situation is exceptionally uncertain.''

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