September 3, 2008 / 12:08 PM / 11 years ago

Europe gloomy, U.S. vulnerable

NEW YORK/PARIS (Reuters) - Major economies on both sides of the Atlantic are increasingly vulnerable to each other’s weakness, as the euro zone teeters on the brink of recession while the United States is barely muddling through, data showed on Wednesday.

People walk by a shop with discount signs announcing summer sales in Paris, June 25, 2008. REUTERS/Charles Platiau

Europe showed just how exposed its economy is to a broader downturn in the industrialized world with news that weak investment, household spending and exports all hurt in the second quarter, when the economy shrank.

EU statistics office Eurostat’s first breakdown of the reasons for a drop in gross domestic product in the second quarter showed the chief culprits were a more than 1 percent slide in investment as well as a fall in household spending.

Declines in growth of 0.2 and 0.1 percent quarter-on-quarter in the euro zone and the wider 27-country European Union respectively have fueled fears the bloc will slide into full-blown recession.

Business surveys for August also showed activity in the services sector, as in manufacturing, dipped yet again in August, if not quite as much as in July, suggesting the third quarter would be little better.

In the United States, factory orders rose slightly more than expected in July, but weakening demand around the globe may damage the sector, which has depended on exports as a key support this year.

“Factory orders were no real big surprise and very close to the consensus. You are seeing strength in exports offsetting a lot of the weakness in domestic demand,” said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida.

“Because of the strengthening dollar and the fact that the global economy is slowing down, we will not get as big a contribution from exports in future,” Brown said.

Factory orders rose 1.3 percent in the month after an upwardly revised 2.1 percent gain in June, the Commerce Department said.

Economists polled by Reuters were expecting factory orders to gain 1 percent in the month. Factory orders have risen for five months in a row.

With a weak jobs picture, U.S. domestic demand is unlikely to pick up much of the slack from slowing global growth.

Planned layoffs at U.S. companies were running 12 percent higher in August than a year ago, according to a report from employment consulting firm Challenger, Gray & Christmas Inc.

Optimists will take heart from the fact that job cuts at U.S. companies last month were 14 percent lower than a month earlier. However, with U.S. companies’ planned layoffs up 29 percent in January to August from the same period a year ago, economic damage has already been done.

The government’s more comprehensive labor market report is due on Friday. Analysts expect it to show a decline in jobs for the eighth consecutive month in August.

BAD SERVICE

Britain’s dominant service sector shrank in August for the fourth straight month, a survey on Wednesday showed, although signs of weakness were much less pronounced than expected.

In Asia, where Japan’s economy also contracted in the second quarter, Wednesday’s focus was more on South Korea, where the government is struggling to stem a slide in the won, which has fallen some 10 percent since early July.

Amid further suspected intervention to support the currency, government officials acknowledged the economy was in difficulty but dismissed the idea of deeper trouble in a country that was hit hard by the Asian financial crisis of the late 1990s.

The euro zone numbers showed a drop in investment of 1.2 percent knocked 0.3 percentage point off GDP and a 0.2 percent dip in household consumption took GDP down by another 0.1 percentage point. Exports dropped 0.4 percent, but the net effect on GDP was offset by less imports.

The picture was broadly the same for the EU as a whole, which includes countries such as Britain, Sweden and many from the formerly Communist bloc on Europe’s eastern flank.

GERMAN RECESSION?

Germany added to the confusion and recession speculation.

Finance Minister Peer Steinbrueck told Reuters on Tuesday that his country, with a target of 1.7 percent growth for 2008, was not facing recession, but a more junior minister said close to the opposite on Wednesday.

“If we end up with zero in the third quarter, we can consider ourselves lucky. The trend is more that we’ll see a negative number,” Deputy Economy Minister Walther Otremba said in an interview with Reuters.

German GDP dropped 0.5 percent in the second quarter compared with the preceding one. Two consecutive quarters of contraction is generally called a recession by economists.

As for early signs for the third quarter, monthly surveys of business showed further contraction in service-sector activity in August in the euro zone, just as a similar survey showed for manufacturing.

The Markit Eurozone Services Purchasing Managers Index (PMI) rose marginally in the euro zone from July’s five-year low, to 48.5 from 48.3, but remained below the 50.0 mark that divides growth from contraction for a third straight month.

Additional reporting by Yoo Choonsik, Cheon Jong-woo and Jonathan Thatcher in Seoul; Jan Strupczewski in Brussels; Iain Rogers and Christina Amann in Berlin; and John Parry in New York; Editing by Jonathan Oatis

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