August 14, 2008 / 1:18 PM / 11 years ago

WRAPUP 3-Euro zone economy shrinks for 1st time, eyes recession

(Adds European Commission comments in paragraph 6, economists)

By Jan Strupczewski

BRUSSELS, Aug 14 (Reuters) - The euro zone economy recorded its first ever contraction in the second quarter, pulled down by falling activity in its biggest economies and raising the risk of a technical recession.

The European Union’s statistics office Eurostat on Thursday estimated that the economy of the 15 countries sharing the euro contracted 0.2 percent against the first quarter and grew 1.5 percent year-on- year. Both numbers were as expected.

Eurostat said the quarterly decline was the first since its data series for the euro zone started in 1995. The next weakest result was 0.0 percent growth in the second quarter of 2003.

The fall was still smaller than in the world’s second biggest economy Japan, which shrank 0.6 percent in April-June but well below the United States, which expanded 0.5 percent.

“There is a good chance that the economy is already in recession, but even if it isn’t the outlook remains for subdued growth in the quarters to come,” said Stuart Bennett, senior FX strategist at Calyon.

While the decline was partly a technical reaction to a strong first quarter, when gross domestic product (GDP) grew 0.7 percent from the previous three months, the underlying economic weakness was unmistakable, economists said.

“The strains from the global economic downturn, the surge in oil and commodity prices up until recently, and the euro appreciation have been simply too strong,” said Nikolaus Keis, economist at Unicredit.

The European Commission said while risks to growth were to the downside and confidence indicators painted a gloomy picture, using the term recession would be an exaggeration at this stage.

A technical recession is defined as two consecutive quarters of negative economic growth.

The Commission forecast in April that euro zone economic growth would slow to 1.7 percent this year from 2.6 percent in 2007, but economists said this was now probably too optimistic.

The slowing activity has at least helped curb rampant inflation, economists said, as Eurostat revised down its initial estimate for July price growth to 4.0 percent year-on-year from 4.1 percent.

The ECB left rates unchanged at 4.25 percent last Thursday and said risks to economic growth were starting to materialise.

“With growth slowing abruptly and inflation expectations off their peak, risks of a near-term ECB hike have been wiped out,” said Aurelio Maccario, chief euro zone economist at Unicredit.

But early rate cuts also look unlikely with inflation still running at twice the ECB’s target of below but close to 2 percent, economists said, saying easing might come in 2009.

Economists said inflation was likely to have peaked in July, with the help of a sharp fall in oil prices to around $115 per barrel on Thursday from $147 in mid-July.

“Inflation will remain at 4.0 percent in August, but then decline so that by the end of the year inflation will be close to and possibly even under 3 percent,” said Sunill Kapadia, economist at UBS.

FRENCH SURPRISE

Germany, Europe’s biggest economy, reported a 0.5 percent quarterly fall in April-June GDP, which was better than the 0.8 percent drop expected by economists.

The German Bundesbank told Reuters the dip did not warrant undue pessimism about the economy, although deputy economy minister Walther Otremba told Reuters he could not rule out that the economy would shrink again in the third quarter.

French GDP fell 0.3 percent quarter-on-quarter instead of expanding 0.2 percent as markets expected. French Economy Minister Christine Lagarde rejected talk of a recession in France, but economists were less upbeat.

“The French economy seems clearly to have entered a recessionary phase,” said BNP Paribas economist Mathieu Kaiser.

Italy, the euro zone’s third largest economy, had already announced a deeper than expected 0.3 percent quarterly contraction and the fourth biggest, Spain, grew 0.1 percent quarter-on-quarter, just beating market expectations of no growth at all, but still at its slowest since 1993.

Smaller economies fared better. Greece expanded 0.6 percent, Austria and Portugal 0.4 percent and Belgium 0.3 percent.

Peter Newland, economist at Lehman Brothers, said all the reports painted a similar picture: sharp corrections in fixed investment and exports, which had been the main engine of growth over the past few years, and stagnating private consumption.

(Additional reporting by European bureaux)

Reporting by Jan Strupczewski; Editing by Ruth Pitchford

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