For Europe's economy the worst is yet to come

1st January 2009, Comments 0 comments

This is in stark contrast to the start of 2008 when corporate Europe was predicting another round of record profits on the back a solid first-quarter economic growth rate.

Berlin -- The rapid deterioration in the global economy in recent months means the worst is yet to come for Europe.

Indeed, after a buoyant start to 2008, the 15-member eurozone and its biggest economy Germany could now be facing a very painful year as concerns mount that a protracted recession has been taking hold amid sharply rising layoffs, falling exports, contracting order books and slumping private consumption.

"The present downturn is historic in many of its dimensions," said Elga Bartsch, economist with the US investment house Morgan Stanley. "While the euro-zone has seen phases of stagnation, it has yet to endure a full-blown recession."

The International Monetary Fund, the Organization for Economic Cooperation and Development and the European Central Bank all see eurozone shrinking by at least 0.5 percent next year.

But many economists now believe this could prove to be too optimistic, with mounting evidence that key European export markets in Asia, the Middle East and Eastern Europe are also losing momentum.

This is in stark contrast to the start of 2008 when corporate Europe was predicting another round of record profits on the back a solid first-quarter economic growth rate and the talk was about Europe weathering any downturn unleashed by the US mortgage crisis.

More recently, however, the deepening sense of gloom in European boardrooms has lead many companies to slash profit forecasts and to announce plans for cutting production.

But 18 months after a surge in defaults in risky US subprime mortgages sent shockwaves across global share markets and raised the prospects of a steep world economic downturn, the depth and length of the financial crisis and the subsequent economic slump still remains unclear.

This is despite the raft of economic stimulus packages and bank rescue plans that governments across Europe have launched in a bid to spur economic growth and limit the fallout from the world financial crisis.

Moreover, it remains unclear how the current upheaval will change the global industrial and economic landscape, in particular sectors that have born the brunt of the crisis such as the banking, car and mortgage businesses.

Underscoring the lingering uncertainty facing European bourses, European company stock prices have in some cases plunged by 90 percent since the start of the year as investors around the world have dumped shares.

Meanwhile, fears that emerged earlier this year about rampant inflation as oil prices soared have now suddenly been replaced by worries about deflation.

As a measure of the gravity of the threats facing the eurozone economy, the ECB this month delivered the biggest rate cut ever in its 10-year history with analysts expecting that the bank would continue to reduce the cost of money well into next year.

This is particularly the case as slumping oil prices could result in inflation sliding to 1.4 percent or lower next year. Annual inflation in the currency bloc chalked up its biggest fall in almost 20 years in November dropping to 2.1 percent from 3.2 percent in October.

"The economic outlook remains surrounded by exceptional uncertainty," said ECB chief Jean-Claude Trichet setting out the reasons behind the bank's unprecedented 75-basis-points reduction.

"This is not business as usual," said Klaus Baader, Merrill Lynch's London-based chief European economist. "The current economic conditions warrant unprecedented action."

Economic sentiment in the eurozone tumbled to a 15-year low in November, a key survey released last week showed, after the currency bloc tipped into recession in the third quarter amid signs that access to credit was now also diminishing.

Particularly badly hit by the slump has been Europe's key car industry with the automotive forecasting group JD Power estimating that auto sales in Western Europe fell by 25 percent in November.

The sharp economic contraction is already starting to filter through to the eurozone's jobs market.

Unemployment posted its biggest monthly increase in October, surging to reach its highest level in nearly two years of 7.7 percent, the European Union's statistics office said.

About 100,000 jobs alone have been lost across Europe's financial system since the global financial meltdown accelerated in September in the wake of the implosion of the big US investment house Lehman Brothers.

Other bleak economic data continues to pile up. Key German factory orders plunged 6.1 percent in October, data released this month showed, with the nation's central bank predicting that Europe's biggest economy faces recession next year.

"What started off as a relatively normal correction (in new orders) from very high levels has developed into serious collapse," said ING economist Carsten Brzeski.

"With emerging market growth slowing down and a recession in the industrialized world, the near term outlook for the German industry looks anything but rosy," he said.

Andrew McCathie/DPA/Expatica

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