EU Says Economy May Have Resumed Growth This Quarter

By Simone Meier

Sept. 14 (Bloomberg) -- Europe’s economy probably returned to growth in the current quarter after governments spent billions of euros to pull the region out of the worst recession in more than six decades, the European Union said.

The euro-area economy may expand 0.2 percent in the third quarter and 0.1 percent in the fourth after shrinking 0.1 percent in the three months through June, the European Commission, the EU executive in Brussels, said today in updated economic forecasts. In 2009, the economy may shrink 4 percent, the commission said, leaving its May projection unchanged.

European companies from Germany’s ThyssenKrupp AG to France’s L’Oreal SA have reported results that beat analysts’ estimates, suggesting government efforts to encourage spending are feeding into the broader economy. European Central Bank President Jean-Claude Trichet on Sept. 3 cited “increasing signs” of stabilization. Investors grew more optimistic this month and economic confidence is at a 10-month high.

“The situation has considerably improved over the past months,” said Juergen Michels, chief euro-region economist at Citigroup in London. “The second half will be more positive, but we can’t expect a boom. The recovery will continue through 2010.”

The economies of Germany and France unexpectedly returned to growth in the second quarter. In Germany, Europe’s largest economy, gross domestic product will probably rise 0.7 percent in the third quarter and 0.1 percent in the fourth, the commission said today. The French economy probably expanded 0.4 percent in the current quarter.

‘Unprecedented Amounts’

Italy probably emerged from the recession during the third quarter, while Spain’s economy will continue to shrink through 2009, according to the forecasts. The U.K., which isn’t in the euro region, may resume growth this quarter and expand 0.5 percent in the fourth quarter, the EU estimates.

“The situation improved mainly due to the unprecedented amounts of money pumped into the economy by central banks and public authorities,” EU Monetary Affairs Commissioner Joaquin Almunia said in a statement accompanying the forecasts. “We need to continue implementing the recovery measures” this year and in 2010.

The ECB earlier this month raised its forecasts for the euro region to predict expansion of about 0.2 percent in 2010 instead of a previously projected 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago. The EU forecasts a 0.1 percent contraction next year.

Bottomed Out

Paris-based L’Oreal, the world’s largest cosmetics maker, on Aug. 28 posted a smaller-than-forecast drop in earnings and said sales will gradually improve through the second half. Dusseldorf-based ThyssenKrupp, Germany’s biggest steelmaker, last month reported a third-quarter loss that was less than analysts projected and said there are signs that prices and sales volumes for some products have bottomed out.

Rising unemployment and the expiration of government stimulus packages may damp economic growth next year. International Monetary Fund Managing Director Dominique Strauss- Kahn said on Sept. 4 that there is a “real danger” policy makers will withdraw support measures for their economies too soon, jeopardizing the global recovery from recession.

In the U.S., the world’s largest economy, the recovery may be the slowest since World War II to regain all the ground lost during the recession, according to JPMorgan Chase & Co. chief economist Bruce Kasman. The Federal Reserve may hold its target for the key U.S. rate between zero and 0.25 percent through 2010, he said.

‘Economic Malaise’

“We’re going into an extended period of weak economy, of economic malaise,” Joseph Stiglitz, the Nobel Prize-winning economist, said in an interview yesterday. “If workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The ECB on Sept. 3 kept its key rate at a record low of 1 percent to encourage spending. The Frankfurt-based central bank providing banks with unlimited cash for 12 months and is buying covered bonds to fight the crisis.

“It seems that the period of strong economic contraction is behind us,” ECB council member Yves Mersch wrote in the quarterly bulletin of the Bank of Luxembourg published on Sept. 10. Still, the recovery will “be very gradual and volatile, partly because of the temporary nature of some of its underpinnings, such as government stimulus,” he said.

1,500 Jobs

Air France-KLM Group said on Sept. 4 that it will eliminate 1,500 jobs and slash capacity by 5 percent in order to bring down costs. Siemens AG, Europe’s largest engineer, has said that it plans 1,600 job cuts beyond the 17,000 announced last year and has placed 15,000 workers on reduced hours.

European stocks were lower. The Dow Jones Stoxx 600 Index was down 1.5 percent at 238.14 at 10:02 a.m. in London.

Companies are cutting costs just as retreating oil prices are pushing down inflation. Euro-area consumer prices have posted annual declines for three straight months. The ECB said on Sept. 10 that, while “inflation rates are projected turn positive again within the coming months,” price developments will remain “subdued” amid “ongoing sluggish demand.”

Euro-area consumer prices probably dropped 0.3 percent this quarter before rising 0.7 percent in the three months through December, the commission forecast today. In the year, inflation may average 0.4 percent, it said. The ECB aims to keep inflation just below 2 percent.

Policy makers have suggested the ECB may start unwinding some of its non-standard measures, such as the emergency lending to banks, as soon as a recovery starts to feed into inflation.

“As soon as upside risks to price stability emerge in a context of an improving macroeconomic environment, it will be time to withdraw the policy stimulus,” ECB Executive Board member Juergen Stark said on Sept. 4. The ECB sees “signs that the massive response from governments and central banks has been effective and that the global recession is bottoming out.”

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