Learning in the News XXI - For Intermediate Business Students

Fears of a Recession Growing in Europe

Publishe in the New York Times – October 14,2008.
By DAVID JOLLY
Published: October 14, 2008

PARIS — If there is a bright spot amid the chaos in the financial markets, it is that it helps to settle a debate among economists about the outlook for the European economy.
Even before the credit crisis exploded back into the headlines last month with the collapse of Lehman Brothers, European economists were increasingly pessimistic about regional prospects. With the financial sector’s problems weighing directly on the broader economy, many economists say Europe is already in recession and will be lucky to get out of it by summer.
There will be no official confirmation until Nov. 14, when Eurostat, the European Union statistics agency, announces third-quarter growth figures, but the agency said Tuesday that industrial production in the euro zone fell 0.7 percent in August compared with output in the month a year earlier.
Gross domestic product in France contracted by 0.1 percent in the third quarter, the French central bank said, reversing the previous estimate of an increase of 0.1 percent. That means France has joined Spain, Ireland and Denmark in posting two consecutive quarters of economic contraction, a widely accepted definition of recession.
And the ZEW research institute said its economic sentiment indicator for Germany tumbled this month by 21.9 points, to minus 63.0, a number suggesting tough times ahead. The institute, based in Mannheim, Germany, did note, however, some indications that sentiment had improved somewhat after the announcement Monday of taxpayer bailouts for the global financial system.
The German finance minister, Peer Steinbrück, acknowledged the danger that the country’s economy, which declined in the second quarter, might be heading into recession, saying such fears were not “mere pessimism.”
Jörg Krämer, chief economist at Commerzbank in Frankfurt, said: “There may not be a consensus yet, but the optimists are giving in. The camp of those who forecast a recession is rapidly growing.”
“Even before the financial market crisis, there was a problem of falling house prices in Europe — in the U.K, Spain and Denmark,” Mr. Krämer said. “That’s a big burden.”
A report from the Royal Institution of Chartered Surveyors showed British real estate agents sold on average just 11.5 properties for the three months through the end of September. That is a 52 percent decline from a year earlier and was the lowest since at least 1978. In London, the figures were worse, with just 8.3 properties sold on average by real estate agents in the last three months. And most agents reported that home sale prices were falling.
Spanish home prices, meanwhile, fell 4.9 percent in September from a year earlier, according to a report Tuesday from Tinsa, a property company.
Germany, the largest European economy, has been the big question mark, with its export powerhouses thriving despite the slowdown elsewhere. But Mr. Krämer said there was no way the country’s exports could keep growing as the economies of its main trading partners declined.
Gilles Moëc, senior economist at Bank of America in London, said European growth would be hurt by a declining labor market.
Mr. Moëc said the job market had been resilient, aside from in Spain, because companies had been hanging on to employees in the hope that any downturn would be only temporary. But the credit crisis is now directly hurting nonfinancial businesses, he said.
“We’ll probably see the labor market start to deteriorate quite rapidly in the next few months,” he said, and that will hurt consumer spending.
Inflation, which just a few months ago ranked among Europe’s biggest concerns, has largely dropped off the radar in the face of the credit crisis. Relatively benign consumer price reports Tuesday from Italy, France and Spain confirmed expectations that price pressures would ebb with the sell-off in the commodities markets. But British consumer prices rose 5.2 percent in September from a year earlier, accelerating from the 4.7 percent rise in August, as natural gas and electricity bills rose.
Economists are now predicting that with long-term inflation expectations stabilizing, the European Central Bank could cut benchmark interest rates several times by the middle of next year.
Mr. Moëc said he was optimistic that growth would be back on track by the summer. The caveat, he said, was that oil prices could rebound or credit markets could freeze up again. In either of those cases, “you can say goodbye to a recovery,” he said.
“The question is not whether we get a recession or not,” Mr. Krämer said. “To me the question is do we get a multiyear recession like in Japan” in the 1990s.

Vocabulary:
Amid: among, amongst
Broader: wider
to get out of: to leave
third-quarter: 3ro semester (easier explained in Portuguese)
figures: numbers
output: results
Gross domestic product: Produto Doméstico Bruto (easier explained in Portuguese)
Tumbled: felt greatly in value in a short time
tough times: hard times, difficult times
taxpayer: a person who pays tax
bailouts: to help a person or organization that is in difficulty, usually by giving or lending them money
acknowledged: accepted, admitted or recognized something, or the truth or existence of something
forecast: to say what you expect to happen in the future
burden: something difficult or unpleasant that you have to deal with or worry about
real estate agents: Corretores de imóveis (easier explained in Portuguese)
average: the result obtained by adding two or more amounts together and dividing the total by the number of amounts (a media – easier explained in Portuguese)
meanwhile: while something else is happening
powerhouses: a country, organization or person with a lot of influence, power or energy
thriving: growing, developing, getting to be very famous
trading: buying and selling, or exchanging, goods and/or services
labor market: Mercado de trabalho (easier explained in Portuguese)
resilient: able to quickly return to a previous good condition
aside: on or to one side
downturn: a reduction in the amount or success of something, such as a country's economic activity
ebb: to become less strong or disappear
sell-off: when the price of goods in a shop or factory is reduced so they can be sold quickly
bills: a request for payment of money owed, or the piece of paper on which it is written
benchmark: a level of quality which can be used as a standard when comparing other things
rebound: to bounce back after hitting a hard surface