Europe showing signs of stability

Published July 10, 2009


(PARIS) Economic reports and forecasts released on Wednesday suggested that the decline in European economic activity had stabilised, at least for now.
Factory activity up: German industrial production surged in May by the most since August 1993, rising 3.7 per cent month-on-month, led by vehicle production

A report prepared by three leading European economic institutes said that while the region's prospects remained subdued, the contraction was expected to be less sharp in the coming months.

The three institutes - Ifo of Germany, Paris-based Insee and Isae of Italy - forecast that the gross domestic product (GDP) for the 16 countries using the euro would shrink 0.6 per cent in the second quarter and 0.4 per cent in both the third and fourth quarters.

'The fall of industrial production is likely to continue but at a progressively slowing pace: recent business surveys indicate slightly improving production growth expectations but the economic environment remains unsupportive,' the report said.

Private consumption is expected to keep falling through the year as the deterioration of the labour market continues to subdue spending, the group said, and corporate earning prospects 'are still depressed and credit conditions are likely to remain restrictive due to recession caused write-offs'.

In its latest report, Eurostat, the European Union's statistics agency, said that GDP in the 27-country union declined 2.4 per cent in the first quarter compared with the fourth and 4.7 per cent from the period a year earlier. For the countries that use the euro, GDP contracted 2.5 per cent on the quarter and 4.9 per cent from a year earlier.

The statistics showed particular weakness in emerging economies, with the GDP falling 11.2 per cent for the quarter in Latvia and Slovakia, 10.5 per cent in Lithuania and 2.3 per cent in Hungary.

Germany's GDP was down 3.8 per cent from the previous quarter and 6.9 per cent from the period a year earlier, the report said.

'We hope Q1 was the worst, and we hope to see a stabilisation over the next few months,' an economist at Investec Securities in London, David Page, said.

Other data showed that German industrial production surged in May by the most since August 1993.

Industrial output rose 3.7 per cent month-on-month in May, according to Germany's ministry of economics and technology. Economists had predicted an increase of 0.5 per cent. Output was still down 17.9 per cent from a year ago.

The gain came after production fell 2.6 per cent in April, revised from a 1.9 per cent decline, the agency said. May's rebound was led by vehicle production, up 24 per cent, helped by continued purchase incentives for consumers.

Machine tools, chemicals and pharmaceuticals and metals output rose, but construction and energy output declined, the report showed.

Wednesday's report follows a more forward-looking release on manufacturing orders, which showed an increase in both domestic and foreign manufacturing orders for May.

'A number of this magnitude can't be ignored,' Mr Page said, adding that the German production numbers should continue to improve and add to a broader recovery across the continent.

Sweden, meanwhile, said that industrial production declined in May, falling 2.7 per cent on April and 21.9 per cent on a year earlier. Industrial output in Sweden has not recorded a monthly gain since January 2008.

'On a more positive note, the very sharp falls in industrial output in Sweden have entailed a significant drawdown of inventories,' said Varun Bhabha, an analyst at Barclays Capital.

A survey from the Bank of France showed business confidence climbing in June amid signs that recovering exports were helping to ease the recession.

The Bank of France's business sentiment indicator climbed to 84, from 81 in May. In December, it touched a record low of 68. A services confidence indicator was also up at 78 in June, after 77 in May and 76 in April.

'The outlook for activity and demand in the short term appears to be improving slightly but remains unfavourable overall,' the central bank said. -- NYT