Bloomberg News

Euro-Region Economy Stalls as Exports Offset Construction Drop

December 07, 2011

Dec. 6 (Bloomberg) -- Euro-region economic growth held steady in the third quarter as rising exports helped offset the impact of a slump in construction.

Gross domestic product rose 0.2 percent from the second quarter, the European Union’s statistics office said today, confirming an initial estimate published on Nov. 15. Exports increased 1.5 percent from the second quarter, when they gained 1.1 percent, while household spending advanced 0.3 percent. Construction output dropped 0.6 percent.

Europe’s economy shows signs of weakening in the current quarter as the fiscal crisis spreads from periphery nations to core countries and global demand falters. Services and manufacturing output contracted more than initially estimated in November and German investor confidence dropped. The European Central Bank will probably cut interest rates on Dec. 8, a Bloomberg survey shows.

“We’re likely to see a significant contraction in the fourth quarter,” said Nick Kounis, head of macroeconomic research at ABN Amro in Amsterdam. “There are serious economic drags. We think the recession is going to last into next year.”

In Germany, Europe’s largest economy, GDP rose 0.5 percent in the third quarter, up from a 0.3 percent gain in the previous three months. France’s economy returned to growth, while Spain reported stagnation. Portugal remained in a recession.

Waning Confidence

The European Commission said on Nov. 10 that the euro- region economy may expand 1.5 percent this year and 0.5 percent in 2012. The ECB, which currently projects growth of 1.6 percent and 1.3 percent for this year and next, respectively, will publish its latest estimates on Dec. 8.

Adding to signs of a deepening slowdown, euro-region economic confidence dropped more than economists forecast in November as consumers and manufactures grew more pessimistic. Unemployment increased to 10.3 percent in October from the previous month, the highest in more than a decade.

Euro-region imports rose 1.1 percent in the third quarter, up from a 0.3 percent gain in the previous three months, today’s report showed. Gross fixed capital formation rose 0.1 percent after stalling in the second quarter, and government spending remained unchanged. Construction output had the biggest drop in almost a year in the third quarter.

The ECB will lower its benchmark interest rate by 25 basis points to 1 percent, according to a Bloomberg survey. The central bank has been forced to purchase government bonds and offer banks unlimited cash to fight the crisis, with President Mario Draghi last month forecasting a “mild recession.”

Draghi, who took over last month, signaled last week that the central bank could step up its efforts if euro-area governments forge a closer fiscal union. Should a “new fiscal compact” emerge, “other elements might follow,” he said.

“There should be scope for the ECB to undertake a more aggressive policy response than the 25 basis point easing,” said Simon Smith, chief economist at foreign-exchange broker FXPro Group Ltd. in London. “But there are many aspects of ECB policy now caught in the swirl of euro-zone debt crisis and policy is about far more than just interest rates.”

--Editors: Patrick G. Henry, Andrew Clapham

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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