Euro zone engulfed by dismal data, eyes on ECB

12 Jan, 2009

Euro zone economic sentiment hit an all-time low in December and German exports posted a record drop, pointing to a fast-deepening recession and piling pressure on the European Central Bank to keep cutting interest rates. The European Commission said economic sentiment in the 15 countries using the euro fell in December to the lowest level since records began in 1990. Business morale also worsened. Ken Wattret, chief euro zone economist at BNP Paribas said the data “reinforce our view that the economy is in meltdown” and forecast the ECB would cut its key interest rate by half a percentage point at its meeting next Thursday. Manufacturers in Europe have been rocked by a sharp downturn in global demand since the financial crisis erupted, prompting widespread job losses and hitting domestic investment hard. Governments have launched stimulus packages worth billions to offset the crisis and the ECB has already lowered rates by 175 basis points in three cuts since October, including a record 75 basis points last month, but the gloom has only mounted. “The European Commission data, along with other leading indicators, are indicative of a need for radical policy action from the ECB and soon!,” Wattret wrote in a research note. European Economic Affairs Commissioner Joaquin Almunia, speaking in Slovakia, admitted “the economic situation is deteriorating very quickly,” but said it was reasonable to expect a gradual recovery toward the end of this year. Stung by crumbling demand, exports from Germany, Europe’s biggest economy, fell by an unprecedented 10.6 percent month-on-month in November, official data showed. German manufacturing orders plunged 6 percent after a record collapse in the previous two months. At the other end of the continent, a bigger than expected rise in the number of jobless in December meant that unemployment in Spain is now topping 3 million for the first time ever, government data showed. Separately, the European Commission’s business climate index for the single currency area tumbled to -3.17 points — the lowest since records started in 1985 — from -2.10 in November. UniCredit’s Aurelio Maccario said the euro zone economy is suffering “by far the worst phase in its history.” He said the ECB “cannot take a break in its easing campaign” as probably the majority of the council would have preferred after the record December cut. Commerzbank economist Christoph Weil said the Commission figures pointed to a contraction in euro zone GDP of between two and three percent this year and forecast the ECB would cut rates in coming months by a further 150 basis points to 1 percent. Jennifer McKeown, an economist at Capital Economics, said the ECB could have to cut rates to “more or less zero.” Three of the euro zone’s leading think tanks, Germany’s Ifo, France’s INSEE and Italy’s ISAE slashed their projections for growth in the 16-nation bloc on Thursday. In quarterly joint forecasts the institutes estimated the economy contracted 0.6 percent between October and December, compared with an October projection of a flat reading. They said growth will contract by 0.4 percent in the first quarter of this year, down from a previous prediction of +0.1 percent, and shrink by 0.2 percent in the second quarter. GDP fell 0.2 percent in the second and the third quarters of 2008, throwing the euro zone into a recession which is looking increasingly dramatic. The think-tanks forecast that inflation will continue to fall sharply and average just 0.6 percent annually in the second quarter, far below the ECB’s 2 percent reference ceiling. The German trade figures showed demand for goods was weakest from European Union countries outside the euro area, falling by 16.1 percent on the year. Germany has been the world’s biggest exporter of goods since 2003, and analysts said the latest figures reflected the pain now being felt by the likes of the car and chemical industries. “December’s (trade) figures will be even worse,” Axel Nitschke, head of foreign trade at the German chambers of industry and commerce (DIHK) told Reuters. German carmakers such as Daimler and Volkswagen have already carried out or considered cuts to production to compensate for weak demand. Earlier this week, Daimler said its Mercedes-Benz cars division saw a 23.5 percent decrease in U.S. sales in December. Deutsche Bank has predicted the German economy could contract by up to 4 percent this year — which would been more than four times as bad as the country’s previous post-war nadir. If this were to come about, German unemployment could double to around 6 million, Goldman Sachs has forecast. (credit: reuters.co.uk)

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