Europe on the brink of recession

Gloomy outlook for global economy as growth in EU shrinks by 0.2%

The Straits Times, 15 Aug 2012

BRUSSELS - Europe is edging closer to recession, weighing down the already dim prospects for the global economy.

Eurostat, the European Union's statistics agency, revealed that the economies of both the euro zone and the wider 27-country EU shrank by 0.2 per cent in the second quarter of the year.

Without Germany continuing to post at least some growth, the euro zone would officially have been in a recession.

Europe's largest economy grew 0.3 per cent in the second quarter. Though down on the 0.5 per cent recorded in the first quarter, the advance was a little more than expected - most economists thought Germany would grow by only 0.2 per cent.

In the first quarter, output for both the euro zone and the EU was flat. A recession is officially defined as two straight quarters of falling output.

Economists fear the headwinds from Europe will make it even more difficult for the US, China and Japan, the world's largest economies, to bounce back.

Europe is the US' largest export customer and any fall in demand hits order books. A preliminary report released by Washington last month said the US economy grew at an annualised rate of 1.5 per cent in the second quarter, falling under 2 per cent for the first time in three quarters.

China, the EU's biggest trading partner, grew by 7.6 per cent in the same quarter, dipping below 8 per cent for the first time in three years. Japan on Monday reported that its gross domestic product (GDP) grew 1.4 per cent, a sharp slowdown from the 5.5 per cent of the previous quarter.

Singapore last week reported that the economy had shrunk 0.7 per cent in the second quarter compared with the first.

Weak labour market conditions in the US, as well as the unresolved euro zone debt crisis, were cited by the Ministry of Trade and Industry as areas of concern.

The results follow an earlier warning by the Monetary Authority of Singapore that annual GDP growth could come in below 1 per cent this year if the euro zone debt crisis significantly escalates, for example. The EU is Singapore's largest export market.

Slower economic growth in the euro zone is making it harder for governments and central banks to control the debt crisis in the region. Shrinking economies make it more difficult to get public finances into shape. Lower output dents tax revenues while forcing up the cost of social benefits.

"The big picture is that the economic growth required to bring the region's debt crisis to an end is still nowhere in sight," said Capital Economics chief European economist Jonathan Loynes.

"The slowdown has spread from the periphery into the core," said Mr Tom Rogers, an analyst with Ernst & Young in London.

For those countries at the front-line of Europe's debt crisis, yesterday's figures made for grim reading. Italy and Spain, the euro zone's third and fourth largest economies, shrank by 0.7 per cent and 0.4 per cent respectively in the second quarter.

France, the second largest economy, posted zero growth for the third quarter in a row.

Unsurprisingly, Greece fared the worst - its economy is 6.2 per cent smaller than a year ago and back at the level it was in 2005.

Policymakers from around the world are urging more decisive action, particularly from the European Central Bank, to restore confidence to the global economy.

REUTERS, ASSOCIATED PRESS, BLOOMBERG