Hard times starting to hit euro area
YANNIS KONTOS, Bloomberg News
Lucas Papademos, vice president of the European Central Bank, at the ECB Governing Council meeting in Athens. With inflation high, the bank is in no rush to lower interest rates as growth slows.
For the European Union, a global slowdown, dearer oil, a strong euro and the credit crunch all begin to bite.
By THE ECONOMIST
Last update: May 19, 2008 - 10:40 PM
For a while, the euro-area economy seemed to make light of global gloom. Rising food and gasoline prices crimped consumer spending, but firms in the euro area were contentedly working through order books fattened by resilient export demand. Perky business confidence, especially in Germany, helped drive the euro up, briefly over $1.60 in April.
New figures show that the first quarter was surprisingly strong. GDP rose at an annual rate of 2.8 percent, far stronger than in either America or Britain. Spain's growth was only 1.2 percent, making this its weakest quarter for over a decade. But Germany's economy grew by 6 percent, as construction firms took advantage of warm weather. France managed a solid 2.4 percent.
Yet this could be the high-water mark. European businesses have suddenly become a lot glummer. A bellwether survey of German firms by Ifo, in Munich, showed confidence dropping in April to its lowest in more than two years. French business confidence, which had briefly flowered, wilted as well; Italian firms have sunk further into gloom.
That firms are feeling less chipper is not so surprising. Much of industry's earlier ebullience was founded on export sales, which made the euro area vulnerable to a global downturn. The malign effects of the credit crunch are now clearly visible in the euro area's biggest foreign markets, Britain and America. Even Germany's export engine is spluttering: Shipments fell in February and again in March. Firms are now complaining more vociferously that the euro's strength is hurting demand.
Equally worrying is the fragile state of consumer spending, a drag on the economy ever since the credit crunch began last summer. Retail sales fell again in March, the fourth drop in the past six months, leaving them 1.6 percent lower than a year earlier. |
