Europe falls into recession for first time in 15 years

By Fergal O'Brien  |   2008-11-15  |     NEWSPAPER EDITION

EUROPE'S economy fell into its first recession in 15 years in the third quarter, paving the way for deeper cuts to interest rates and taxes amid the worst financial crisis since the Great Depression.

Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said yesterday. The two quarters of contraction — the result of this year's surges in the cost of credit, the euro and oil prices — mark the first recession since the single currency was introduced almost a decade ago.

Consumers and companies are feeling the pain as sales, profits and hiring deteriorate, forcing the European Central Bank to embark on the fastest round of rate cuts in its history and governments to line up fiscal-stimulus programs. With the United States and Asian economies also struggling, leaders from the world's largest nations met in Washington yesterday to discuss ways to limit the impact of the slump.

"The situation is likely to get worse before it gets better," said Nick Kounis, an economist at Fortis in Amsterdam. "There will be no real recovery before 2010."

The German economy, Europe's largest, contracted by a bigger-than-expected 0.5 percent in the third quarter, confirming it has entered its worst recession in at least 12 years, its government said. Ireland and Italy have also slipped into recession this year, while Spain's economy contracted in the third quarter for the first time in 15 years. Growth in the Netherlands and Portugal stagnated.

Bucking the trend, French GDP unexpectedly expanded 0.1 percent from the second quarter, when it shrank 0.3 percent.

Europe's downturn surprised economists who in July saw just a 35-percent chance of a recession occurring in 2008. Policy makers expressed confidence earlier in the year that the economy would dodge a recession even as the US faltered. The European Commission began the year predicting growth of 1.5 percent in 2009, only to cut its forecast to just 0.1 percent as the financial crisis escalated.

Other major economies may not be far behind the euro region as the International Monetary Fund predicts the worst global slump in almost three decades. The US economy contracted 0.1 percent in the third quarter, after a fiscal stimulus package boosted it by 0.7 percent in the previous three months. The UK economy shrank 0.5 percent, marking the first decline in 16 years.

In China, where the government has announced a US$586-billion stimulus package, the economy grew at the slowest pace in five years in the third quarter. Japan's economy, the world's second-largest, was probably at a standstill, according to economists surveyed by Bloomberg News.

The euro remained lower against the dollar after yesterday's reports, trading at US$1.2691 in London.