By Brian Swint and Fergal O’Brien
Jan. 19 (Bloomberg) -- The euro-area economy will contract this year for the first time since the currency was introduced a decade ago, the European Commission forecast, cutting its outlook for the region amid the worst financial crisis since World War II.
The economy of the 16 countries sharing the euro will shrink 1.9 percent in 2009, the Brussels-based commission said today, revising a November estimate for growth of 0.1 percent. European Central Bank President Jean-Claude Trichet today said economic prospects are “substantially” worse than the ECB predicted just last month.
“The overall outlook is grim,” European Union Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels today. “In 2009, we are forecasting negative growth for 11 out of the 16 euro-area members.”
European companies are slashing spending and jobs as they grapple with a global slump that’s eroding demand for everything from chemicals and automobiles to luxury goods. As growth contracts, the ECB has cut its key interest rate to match the lowest since the euro’s launch in 1999, while European governments have orchestrated bank rescues and fiscal-stimulus packages to bolster their economies.
Governments in the U.S., Japan and China are pushing stimulus plans for their own economies, which are also mired in the fallout from the global financial crisis. The commission forecast that the U.S., the world’s biggest economy, will contract by 1.6 percent this year, while Japan’s economy will shrink 2.4 percent.
Obama Plan
U.S. President-elect Barack Obama, who will be inaugurated in Washington tomorrow, proposed an $850 billion, two-year package of tax cuts and increased spending. In China, the government has reduced taxes and unveiled a 4 trillion yuan ($585 million) package.
In Europe, the slump deepened in the fourth quarter, according to the commission, which estimates that gross domestic product shrank by 1.5 percent in the final three months of the year after a 0.2 percent contraction in the previous two quarters. The economy will continue to contract in the first two quarters of this year, it said.
Spain, the euro area’s fourth-largest economy, had its AAA sovereign credit rating removed by Standard & Poor’s today as its budget deficit swells. It was the second downgrade of a euro- region government in five days, after Greece last week
Extended Declines
The euro extended declines against the dollar after the downgrade and the commission’s forecasts, falling 0.7 percent to $1.3173 at 1:45 p.m. in London.
As the euro-area economy slumps, unemployment will rise and the region’s budget deficit may breach the EU limit of 3 percent of GDP for the first time since 2003, according to the commission. It sees the region’s unemployment rate increasing to 9.3 percent this year from 7.5 percent in 2008. The budget deficit will probably swell to 4 percent this year and 4.4 percent in 2010 from 1.7 percent in 2008, it said.
“The year 2009 will be very difficult,” Trichet said today in a speech in Paris. “Growth in the world and Europe will be substantially below what” most institutions projected at the start of December, he said.
The ECB last month forecast the euro-region economy would contract about 0.5 percent this year. Since then, data suggest Europe has slipped deeper into a recession, with economic confidence plunging to a record low and services and manufacturing activity contracting for a seventh month.
Demand Falters
Companies from Siemens AG, Europe’s largest engineering company, to retailer Carrefour SA, the region’s biggest retailer, have reported waning demand. Germany’s BASF SE, said today it may cut more jobs after its global business “declined significantly.”
The ECB has offered additional funds to banks as they nurse losses from the global financial turmoil. German Chancellor Angela Merkel this month prepared a second stimulus plan of as much as 50 billion euros ($66 billion) that includes tax cuts and aid to the country’s automobile industry. France has approved a 26 billion-euro stimulus program.
The measures will help to “put a floor” under the deterioration and “create the conditions for a gradual recovery in the second part of 2009,” Almunia said.
The euro region will return to growth next year with an expansion of 0.4 percent, today’s forecasts show. This year, Ireland will contract 5 percent, Germany 2.3 percent and economic output in Spain will drop 2 percent. The economy of the 27 countries in the EU will shrink 1.8 percent this year, according to the commission forecasts.
The U.K., a member of the EU that doesn’t use the euro, today announced the second bank rescue in three months, proposing insurance to underwrite mortgage-backed debt and toxic assts. The government also gave the Bank of England authority to buy assets as a tool of monetary policy as the benchmark U.K. interest rate approaches zero.
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.
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