Europe Economy Falls Into First Recession in 15 Years

By Fergal O'Brien and Simon Kennedy

Nov. 14 (Bloomberg) -- Europe's economy fell into its first recession in 15 years in the third quarter, paving the way for deeper cuts to interest rates and taxes amid the worst financial crisis since the Great Depression.

Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said today. The two quarters of contraction -- the result of this year's surges in the cost of credit, the euro and oil prices -- mark the first recession since the single currency was introduced almost a decade ago.

Consumers and companies are feeling the pain as sales, profits and hiring deteriorate, forcing the European Central Bank to embark on the fastest round of rate cuts in its history and governments to line up fiscal-stimulus programs. With the U.S. and Asian economies also struggling, leaders from the world's largest nations meet in Washington today to discuss ways to limit the impact of the slump.

``The situation is likely to get worse before it gets better,'' said Nick Kounis, an economist at Fortis in Amsterdam. ``There will be no real recovery before 2010.''

The German economy, Europe's largest, contracted by a bigger-than-expected 0.5 percent in the third quarter, confirming it has entered its worst recession in at least 12 years, its government said yesterday. Ireland and Italy have also slipped into recession this year, while Spain's economy contracted in the third quarter for the first time in 15 years. Growth in the Netherlands and Portugal stagnated.

Surprised Economists

Bucking the trend, French GDP unexpectedly expanded 0.1 percent from the second quarter, when it shrank 0.3 percent. Economists had forecast a contraction of 0.1 percent.

Europe's downturn surprised economists who in July saw just a 35 percent chance of a recession occurring in 2008, according to the median of 26 forecasts. Policy makers expressed confidence earlier in the year that the economy would dodge a recession even as the U.S. faltered. The European Commission began the year predicting growth of 1.5 percent in 2009, only to cut its forecast to just 0.1 percent as the financial crisis escalated.

Other major economies may not be far behind the euro region as the International Monetary Fund predicts the worst global slump in almost three decades. The U.S. economy, the world's largest, contracted 0.1 percent in the third quarter, after a fiscal stimulus package boosted it by 0.7 percent in the previous three months. The U.K. economy shrank 0.5 percent, marking the first decline in 16 years.

Stimulus Package

In China, where the government has announced a $586 billion stimulus package, the economy grew at the slowest pace in five years in the third quarter. Japan's economy, the world's second- largest, was probably at a standstill, according to economists surveyed by Bloomberg.

The euro remained lower against the dollar after today's reports. The 15-nation currency traded at $1.2691 as of 12:30 p.m. in London, down from $1.2769 in New York yesterday.

The Dow Jones Stoxx 600 was up 2.2 percent to 208.65, having been as low as 205.23 after the GDP data.

The economy of the 15 nations using the euro is suffering from multiple shocks, including the euro's rise to a record $1.60 in mid-summer, the strongest inflation in almost 16 years and oil's jump to an unprecedented $147 a barrel in July. The cost of credit then surged globally after the September collapse of Lehman Brothers Holdings Inc., forcing banks to cut lending to businesses and households and shattering demand for euro-area exports from America to Hungary.

Luxury Products

European car sales plunged almost 15 percent in October, the sixth straight monthly decline, the European Automobile Manufacturers' Association said today. Bulgari SpA, the world's third-largest jeweler, today scrapped its forecast for increased 2008 profit as consumers curb purchases of its luxury products.

Holcim Ltd., the world's second-biggest cement maker, on Nov. 12 said it would shut a factory in Spain as earnings decline. German chemicals supplier BASF SE and French tire maker Michelin & Cie. also are cutting output and jobs.

``The financial crisis has arrived in the real economy,'' BASF Chief Executive Officer Juergen Hambrecht said on Oct. 30. ``It all has some kind of a flavor of a recessionary development.''

The ECB last week lowered its benchmark rate by a half- point to 3.25 percent, the second such reduction within a month. Having raised rates as recently as July to combat inflation, policy makers are now signaling further cuts.

October Inflation

Separate figures today showed that inflation in October eased to 3.2 percent from 3.6 percent in September, matching an initial estimate on Oct. 31. Energy-price inflation cooled from 13.5 percent to 9.6 percent, the lowest since December.

From a year earlier, the euro-area economy expanded 0.7 percent in the third quarter. Both the quarterly and annual rates were in line with the median estimates of economists surveyed by Bloomberg News.

Investors expect the ECB will lower its key rate by at least another half a percentage point at its next meeting on Dec. 4, Eonia forward contracts show. Economists at Fortis and Morgan Stanley this week revised their outlooks to show the ECB cutting to 2 percent next year, while those at Deutsche Bank expect 1.5 percent to be reached for the first time.

While the recent decline of the euro against the dollar and a halving in the price of oil from its peak may provide some strength to the economy, analysts warn the recession may persist for longer in Europe than in the U.S. because its policy makers have been slower to act than counterparts in Washington.

``There has been an excessive degree of complacency'' as the economy was already in recession when the ECB increased its key rate in July, said Marco Annunziata, chief economist at Unicredit MIB in Milan. ``The policy response in Europe is well behind the curve.''

To contact the reporters on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net; Simon Kennedy in Paris at Skennedy4@bloomberg.net.