Eurozone enters its first recession
Nov 21, 2008
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While the major Anglo-Saxon countries grapple with the threat of deflation, prices are – so far at least – not expected to fall in Europe. That's partly because fuel takes a bigger slice of consumer spending in America, said The Economist, so falling prices will exert greater downward pressure on inflation there, while less flexible markets mean prices respond more slowly to the business cycle in Europe. So for now the talk is of recession, not depression. Eurozone GDP slid by 0.2% in the third quarter after a similar fall between April and June, marking the first contraction since the single currency bloc's inception in 1999. Italy is in its fourth recession in a decade, Ireland and Germany are shrinking, and Spain isn't far behind.
The eurozone may well recover sooner than Britain or America. Households are not as indebted as their Anglo-Saxon counterparts, partly because many European countries avoided house-price bubbles. But the immediate outlook is hardly encouraging. Business confidence is plummeting as companies are finding it increasingly difficult to obtain credit, noted Ralph Atkins in the FT, and consumer confidence is at a 15-year low. What's more, the downturn in emerging markets, notably in Eastern Europe, is hitting exports.
Germany is in trouble
That's a particular problem for Germany, the world's top exporter – shipments comprise almost 50% of GDP. A "leveraged play on the fortunes of its trading partners", as Holger Schmieding of Bank of America put it, its reliance on exports and lack of domestic momentum thanks to cautious consumers, means it faces a nasty downturn. Jacques Cailloux of RBS expects it to shrink by 1.2% next year, the worst decline in the eurozone. High time, then, that the German government used its surplus to cut payroll taxes and taxes on the low-paid, said Ian Campbell on Breakingviews. "Go on, Germans, live it up a little... a deflating world would appreciate it."
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