Brazil heightens fears of worsening Europe slowdown
Reuters, Thursday, January 14, 1999 at 12:36
By David Crossland
FRANKFURT, Jan 14 (Reuters) - Financial turmoil in emerging
markets has come back to haunt Europe, with the de facto
devaluation of Brazil's currency reigniting fears that the world
may be on the brink of a global recession after all.
Economists said on Thursday it remained to be seen whether
Brazil's problems heralded a new period of emerging market
turmoil. But they were certain that Brazil has worsened the risk
of a severe economic slowdown in the euro area this year.
"This will further hurt business sentiment because it shows
the emerging markets crisis is not over," said Eckhard Schulte,
economist at Industrial Bank of Japan. "It increases the
downside risk for European growth."
The Brazilian crisis, which hit on Wednesday with the
resignation of Brazil central bank chief Gustavo Franco and the
news it was widening the trading band for the real, ended months
of relative calm in financial markets after a summer bout of
severe turmoil.
It coincided with mounting evidence that the past 18 months
of devaluations, debt problems and recession in Russia and much
of Asia are causing a severe economic slowdown in Europe through
a weakening of global demand for exports.
Most analysts now expect the European Central Bank to
respond by lowering its main refinancing rate before the end of
March, by 25 basis points to 2.75 percent, with a further cut to
2.50 percent expected by mid-1999.
Meanwhile Germany's Federal Statistics Office warned on
Thursday that German exports slowed sharply in the second half
of 1998 and could take their toll on domestic capital investment
in 1999.
Statistics Office President Johann Hahlen said that while
there were signs of a decline in German unemployment, German
exports to to Southeast Asia, Japan and Russia could be said to
have "collapsed."
"A look at the development in the course of the year 1998
shows that foreign demand lost significant momentum. The
southeast Asian and Russian crises contributed to this," Hahlen
said.
The Office also reported robust 2.8 percent growth in
Europe's largest economy in 1998 but the figure was overshadowed
by analysts' estimates that the economy stagnated or even
contracted slightly in the final quarter.
"What we have seen is a significant contraction in
industrial confidence, orders and output. All the indicators
point to a contraction in Q1 in Germany, which is a technical
recession," said Norman Williams, an economist at Barclays
Capital Management.
Deutsche Bank Research estimates that the German economy
shrank by about half a percentage point in the fourth quarter
compared with the third quarter.
It sees German economic growth falling to 1.6 percent in
1999 and expects growth in the euro area to slow to 2.0 percent
this year from just under three percent in 1998.
"The question is whether Brazil will be another domino
prompting other economies to fall. So far we see this risk as
limited," said Ulrich Beckmann, senior economist at DB Research.
Most recent data point to a slowdown.
A Reuters survey of purchasing managers published on Tuesday
showed manufacturing output and orders in the euro area declined
in December for the third consecutive month.
Also on Tuesday, Germany released industrial output data
showing a 2.3 percent fall in November from October while a
record trade surplus of 16.7 billion marks in November masked an
underlying export slowdown.
And French GDP data for the third quarter of 1998 showed a
slowdown in growth to 0.5 percent from 0.8 percent in the
previous quarter.
frankfurt.newsroom@reuters.com))
Copyright 1999, Reuters News Service
|
