The European Economy is Still at Risk!

In the first quarter of 2009, the Euro Area economy shrank 4.9 percent from a year earlier, the biggest decline on record. And although there are some signs that the world’s second largest economy is getting better, it will likely contract further during the next few months.

Indeed, the last few weeks have surprised us with a positive data due to lower inflation and government spending plans. For example, the overall economic-sentiment indicator for the euro zone rose sharply to a seven-month high of 73.3, from 70.2 in May. Moreover, consumer confidence increased three points in June reaching the highest level since November last year. Also, manufacturing and service industries contracted at the slowest pace in nine months in June.

Nonetheless, even though there are plenty reasons to be optimistic we can’t forget that the unemployment rate across the continent rose more than expected to highest in record in May and is likely to increase even further. Moreover, as the global slump curbs orders and rising unemployment undermines consumer spending, companies are being forced to hold production. In fact, Euro Zone industrial production shrank by more than a fifth in April compared with a year earlier, raising risks that the second quarter will be weaker than expected. Most importantly, European Central Bank interest rate cuts and unlimited amounts of cash to banks to revive lending haven’t yet reached the real economy. Indeed, overall credit growth in the 16-country area fell to 4% in May from 4.4% in April and growth in loans to the private sector slowed to 1.8%, from 2.4% in the year through April.

Anna Fedec,
7/8/2009 11:27:35 AM