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Latest update : 2008-08-19

Recent economic indicators have revealed cause for worry, inciting action from the governments of countries with troubled economies like Spain and France.

Read analysis by FRANCE 24's Douglas Herbert: "Honey, I shrank the economy"



Europe has swung towards recession, with the eurozone economy shrinking for the first time and inflation hovering at a record high as the sharp global downturn takes hold, new figures showed Thursday.
  
The 15-nation eurozone economy contracted by 0.2 percent in the second quarter, the EU's official Eurostat agency reported.
  
That figure heightened analysts' fears that recession -- two consecutive quarters of contraction -- is on the way, a prospect now pushing down the euro.
  
"Today’s releases suggest that this probability has risen, probably to over 50 percent now," said Sunil Kapadia, European Economist for UBS Investment Research.
  
Recent data from Britain and Japan also suggest leading economies are flirting with recession; and the International Energy Agency says energy and other data signal the US economy is most probably heading towards recession.
  
The eurozone economy had previously never registered anything worse then zero growth over a quarters, and that was back in 2003.
  
The news was also enough to sound loud alarm bells in European capitals, as well as vacation beaches.
  
Spain's cabinet ministers interrupted their annual holidays Thursday to approve a fresh package of 24 measures aimed at reviving their rapidly deteriorating economy.
  
French Prime Minister Francois Fillon called a meeting of economy ministers for Monday to identify the causes and policy responses.
  
Meanwhile the German economy ministry put a brave face on the figures, saying that the government fully expected a "technical correction" after the strong first quarter and sticking to its full year projection.
  
The eurozone economy had grown by 0.7 percent in the first three months of 2008, held up by a 1.3-percent rise in Germany, where an unusually clement winter boosted the construction industry.
  
That buoyancy slipped away in the second quarter with the German economy, the biggest in the eurozone, contracting for the first time for nearly four years, shrinking 0.5 percent.
  
In Brussels a European Commission spokeswoman shied away from using the "R" word, while acknowledging the eurozone figures looked bad, especially with eurozone inflation running at a record four percent according to Eurostat figures also published Wednesday.
  
"I think it's a bit exaggerated to use that word," she told reporters in Brussels, stressing that the preliminary figures could be revised later.
  
But she also said: "The signs are not really very good for the future".
  
Marc Touati at Global Equities in Paris was pulling no punches. "The recession has started," he said.
  
As the subprime crisis overtook the US economy, some commentators had suggested that Europe might escape the worst effects, but economist Nicolas Bouzou at consultants Asteres said: "The situation in Europe, overall, is serious."
  
The figures for the EU as a whole were scarcely better, with gross domestic product figures dipping by 0.1 percent in the second quarter, despite some British GDP growth.
  
The Bank of England forecast on Wednesday that Britain too faced increased risk of recession with economic growth set to slow further and inflation expected to spike.
  
All commentators stress that this is not just a European problem, with high oil and food prices hitting purchasing power everywhere.
  
The global nature of Europe's economic woes was demonstrated on Wednesday when Japan said its own economy had contracted in the second quarter as falling exports and weak consumer spending sent Asia's largest economy hurtling toward its first recession in six years.
  
At the same time US retail sales fell 0.1 percent in July in the face of slumping car and truck sales as Americans cut back on large purchases.
  
It is the fire of high inflation and the ice of low growth which gives the European Central Bank headaches in setting interest rates while also racing the unwelcome spectre of 'stagflation'.
  
Last week ECB president Jean-Claude Trichet stressed that fighting inflation was the "primary objective" of the eurozone central bank despite the evidence of slowing growth.
  
Trichet spoke after the bank left its benchmark interest rates unchanged at 4.25 percent.
 

Date created : 2008-08-18

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