July 1, 2008 / 3:50 PM / 12 years ago

WRAPUP 1-Denmark gives Europe a touch of recession

COPENHAGEN/PARIS, July 1 (Reuters) - Europe got a first taste of recession on Tuesday when Denmark, a country that fronted the housing boom of the past decade, said economic output had shrunk for two quarters in a row.

In the euro area, nerves frayed ahead of a forecast interest rate increase by the European Central Bank when French President Nicolas Sarkozy said such a move could hit growth and do nothing to lower a record rate of inflation caused by high oil prices.

In the meantime, a lot of the bad news came from countries in and outside the euro area where the housing market boom was one of the main drivers of the economy in recent years — Ireland, Spain and Britain to name three in addition to Denmark.

“Who sinned by housing is punished by housing,” said Gilles Moec, an economist in London for Bank of America.

Gross domestic product in Denmark shrank 0.6 percent in the first quarter of this year compared to the last quarter of 2007, when GDP contracted 0.2 percent quarter-on-quarter, according to revised data published by the national statistics office.

Handelsbanken Chief Economist Jes Asmussen said his bank was now expecting falls of between 5 and 10 percent in single-family homes in both 2008 and 2009, partly because rates there was on the way up, as they appear to be in the euro zone.

BRICKS FALL The Danish news followed confirmation this week that Ireland too is on the brink of recession after a housing slump, that Spain is not any better off for the same reason, plus mounting signs that British house prices are going from boom to bust.

“The news just goes on getting worse for the UK economy,” said Michael Saunders at Citigroup bank after a flow of grim news from Britain.

“Yesterday saw plunges in consumer confidence and mortgage approvals. Today has brought another sharp fall in house prices plus signs that manufacturing activity is heading into recession.”

The Nationwide building society said prices slid 0.9 percent last month and were 6.3 percent down on the year, the biggest decline since December 1992.

Economists believe a crash there in housing will infect the rest of the economy as well, and above all consumer spending, because of the extent to which house-buying and furnishing too were financed by liberal mortgage financing.

Among eurozoners, Ireland said this week its economic output shrank in the first three months of the year, and one of the country’s main forecasters, the Economic and Social Research Institute is predicting recession this year for the first time since 1983.

In Spain, Economy Minister Pedro Solbes said growth was set to slow further in the second quarter from the 0.3 percent quarterly rate in the first three months of the year.

“As of that point, it is hard to say what will happen,” he told a press breakfast. He added that the economy, which is heavily burdened by private sector debt and a current account deficit running at 10 percent of output, would probably touch bottom at the end of this year and the beginning of next.

“We are not assuming there will be a recession.”

Both Spain and Ireland mirrored many of the mortgage funding practices common in Britain rather than the more cautious approach of larger continental European economies.

In France, where house prices have boomed too over the past decade but more conservative mortgage funding should limit the wider fallout, Le Monde newspaper announced the end of the good times for property prices as a front-page headline story.

Even the more racy central and eastern part of Europe seemed to succumb, judging by monthly surveys of corporate purchasing managers that take the pulse in what is considered by many as the closest thing to real time.

Poland’s reading for the manufacturing sector shrank for the second straight month in June and the Czechs showed their third deceleration in growth.

As far as euro zone countries are concerned, news of a drop in Germany unemployment was a rare bright spot as Sarkozy led the charge against the idea of upward moves in ECB rates.

“Today’s inflation ... is caused by exploding commodity prices so don’t try to tell me rates must rise to fight inflation,” the French leader said when discussing his plans for France’s presidency of European Union affairs.

“You can double, triple interest rates and that will not bring a decrease in the price of a barrel of Brent.”

Lorenzo Bini Smaghi, an Italian member of the ECB executive board, said Europe remained dependent on events in the United States, battered by a housing bust, even if perhaps not as much as in the past. “The slowdown in 2008 will continue in 2009 because, and this is the link I was referring to, we are lagging the United States,” Bini Smaghi said at a conference in Rome. (with reporting by Andrew Hay in Madrid, Christina Fincher in London, Michael Winfrey in Prague and Giselda Vagnoni in Rome)

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