Europe may be the first to slip into recession

Aug 11, 2008

Europe may be the first to slip into recession

NEW YORK: The United States might get the last laugh.

For months now, experts have been warning that the US economy would slip into a recession. But now it looks like it is Europe that will be the first, but not the last, to take the plunge.

It was a plunge in orders for German exports that dramatically raised fears that Germany and much of Europe was slowing down.

When preliminary figures for second-quarter economic growth are released this Thursday, most economists expect that countries that use the euro will show a decline in economic activity.

'It now looks likely that the euro zone will be the first major economy to fall into recession,' said Mr Jonathan Loynes, the chief European economist for Capital Economics.

He was relying on a popular definition of recession: two consecutive quarters of decline in gross domestic product, adjusted for inflation. In the US, the official measure is more complicated, relying in part on the judgment of experts at the National Bureau of Economic Research. Some economists think the experts will eventually conclude that a recession has already begun in the US.

With Japan also expected to post a negative figure for second-quarter growth when it reports on Wednesday and the United States already suffering from a weak economy, the three major world economies are all stumbling, a fact that cannot be good news for the emerging economies such as China and India where growth remains strong.

'We see a deep global recession,' said chief strategist at Societe Generale Albert Edwards.

'Growth prospects in the euro zone, Japan and Britain have deteriorated. Most now accept that recession has already begun in all three,' he said.

Mr Edwards predicted a 'collapse' in emerging markets next. 'You ain't seen nothing yet,' he said.

Germany, Europe's biggest economy, is also the world's largest exporter even with the rise of China, which passed the US in 2007. Germany accounts for about a third of euro-zone output.

Its reliance on exports makes the data on new orders among the most watched. The figure for June, reported this week, was down 2.9 per cent from May and was 8.4 per cent below the figure from a year ago.

Order figures can be volatile from month to month. But June was the seventh consecutive monthly decline and some economists had expected a rebound from a particularly weak May figure.

For Germany, export orders are especially weak now, particularly for shipments to other countries that use the euro, as weakness in those countries spreads to Germany. Within export orders, capital goods orders were the weakest, a fact that could foretell a significant problem for German industry if it continues.

Consumer sentiment has also taken a distinct negative turn in recent months in the 15 countries that use the euro.

Fears of a European recession have sent the euro tumbling against the US dollar in the last few days. The euro was at US$1.5004 on Friday, from a record high of slightly more than US$1.60 on July 15.

The decline in the euro has also helped to send oil prices falling by nearly US$5 a barrel to settle at US$115.20 on Friday.

The dramatic drop was ignited by a warning from the European Central Bank on Thursday that high energy costs and more sluggish global growth were finally taking a toll on the 15-nation euro zone, an economy that had seemed remarkably resistant to the turmoil around it for most of this year.

NEW YORK TIMES

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