Europe contracts as world economy slumps, analysts forecast

Business Materials 14 August 2008 08:30 (UTC +04:00)

The European economy shrank during the second quarter, data to be released Thursday is forecast to show, dragged down by a slumping German economy and fuelling worries about a sharp slowdown in the region during the run-up to the end of the year, dpa reported.

While analysts expect the 15-member eurozone to have contracted by 0.2 per cent during the three months to the end of June, Germany is forecast to report that its economy shrank by 0.8 per cent after the currency bloc's biggest economy grew at its fastest pace in 12 years during the first quarter.

Data to be published Thursday is also projected by analysts to show economic growth in France slowing from 0.5 per cent during the first quarter to 0.2 per cent in the latest three months.

This would cut year-on-year growth in the eurozone's second biggest economy from 2 per cent to 1.8 per cent.

The German economy bounded into 2008 following a two-year upswing to chalk up a 1.5-per-cent expansion rate during the first three months of the year.

Since then, however, a steady stream of gloomy economic sentiment surveys and downbeat economic numbers has helped to raise concerns about the outlook for the European economy.

Also overhanging the European economic outlook is the threat posed by resurgent inflation with data to be published tipped to confirm annual consumer prices posted a record 4.1 per cent again in July. Comments last week from European Central Bank chief Jean-Claude Trichet that the eurozone economy faced weak growth in the coming months resulted in the euro suffering its biggest weekly drop, pushing the common currency down to near a six-month low against the greenback of about 1.50 dollars.

This also came amid fears that several eurozone economies which have been hit badly by the global financial market and credit crisis such as Spain, Ireland and Italy could be on the brink of recession.

Italy's statistics office said last week that the eurozone's third economy shrank by 0.3 per cent quarter on quarter, resulting in zero growth on the year. This followed a 0.4-per-cent slump during the first quarter.

On Wednesday, the European Commission's statistics organization Eurostats said eurozone industrial production slipped by 0.5 per cent in June compared to the same month last year.

Economists had predicted a modest 0.2-per-cent increase in June.

A quarter-on-quarter German economic growth rate of 0.8 per cent would mean year on year the nation's economy slowed from 2.6 per cent in the first quarter to 1.7 per cent in the three months to the end of June.

At the same time, year-on-year growth in the eurozone slipped back from 2.1 per cent in the first quarter to 1.5 per cent in the three months to the end of June, analysts' forecast the data to be released on Thursday by Eurostats will show.

The eurozone grew quarter on quarter at 0.7 per cent during the first three months of the year.