Europe’s Economy Shrinks Most on Record on Exports

By Simone Meier

July 8 (Bloomberg) -- Europe’s economy contracted by a record in the first quarter as exports dropped and companies cut spending and jobs to weather the slump in demand.

Gross domestic product in the 16-member euro region shrank 2.5 percent from the fourth quarter, when it declined 1.8 percent, the European Union’s statistics office in Luxembourg said today. That’s the biggest drop since the data were first compiled in 1995 and matches an estimate published on June 3. Investment fell 4.1 percent and exports dropped 8.8 percent.

The economy has shown some signs of recovery from the worst recession since World War II, with measures of business confidence and manufacturing improving in the second quarter. Industrial output in Germany, Europe’s largest economy, surged the most in almost 16 years in May, according to a separate report today.

“The rate of contraction within the euro region clearly moderated substantially in the second quarter,” said Howard Archer, chief European economist at IHS Global Insight in London. “The outlook still looks far from bright and we suspect that a sustainable recovery will be delayed until 2010.”

Euro-area consumer spending fell 0.5 percent in the first quarter, the EU report showed. Government spending rose 0.2 percent and imports fell 7.6 percent. From a year earlier, overall GDP declined 4.9 percent, more than the 4.8 percent estimate.

‘Great Uncertainty’

Germany’s economy shrank 3.8 percent in the first quarter, the biggest drop since data were first compiled in 1970. Italian GDP contracted 2.6 percent, the most since records began in 1980, while the economies of France, Spain and the Netherlands also contracted.

“In the middle of next year, in the second half, we will see some countries returning to positive growth,” ECB Executive Board member Jose Manuel Gonzalez-Paramo told reporters in Madrid today. “That scenario is still surrounded by great uncertainty.”

The World Bank on June 22 cut its outlook for this year, forecasting that the global economy will contract 2.9 percent, compared with a previously projected 1.7 percent. In 2010, the economy may expand 2 percent, the Washington-based lender said.

Unemployment Rising

In Europe, investor confidence dropped for the first time in four months in July. Companies from Austrian Airlines AG to ThyssenKrupp AG are cutting jobs and the region’s unemployment rate rose to 9.5 percent in May, the highest in a decade.

PSA Peugeot Citroen, France’s largest automaker, said yesterday that first-half car and light-truck sales dropped 14 percent as the global slump eroded demand.

Governments have stepped up spending to protect their economies and the ECB this month kept its benchmark interest rate at a record low of 1 percent. It also started buying 60 billion euros ($83 billion) of covered bonds, securities backed by mortgages and public-sector loans, to stimulate the economy. ECB President Jean-Claude Trichet said on July 2 that the euro- region economy is probably past the worst and may show a “gradual recovery” by mid-2010.

MAN SE, Europe’s third-largest truckmaker, probably broke even in the second quarter as the market for commercial vehicles showed signs of recovery, CEO Hakan Samuelsson said on July 3.

“We have reached the bottom,” Samuelsson said. “We are quite sure and positive on long-term transport demand.”

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net