European Investment, Spending Drop as Economy Shrinks

European company investment, consumer spending and exports declined in the second quarter, dragging the economy into a 0.2 percent contraction and pushing it to the brink of a recession.

Investment by companies fell 1.2 percent, the first decline in five years, and household expenditure dropped 0.2 percent after stagnating in the previous three months, the European Union statistics office in Luxembourg said today. The 0.2 percent decline in overall gross domestic product matched an initial estimate published on Aug. 14.

The euro fell today, extending its 7 percent decline over the past month as evidence of Europe's economic slump mounts. Separate figures today show retail sales unexpectedly fell in July and services contracted for a third month in August. The downturn has yet to prompt the European Central Bank to drop its inflation-fighting stance and policy makers will probably keep interest rates at a seven-year high tomorrow.

The overall contraction in the economy is the first since the introduction of the euro almost a decade ago. The decline in company investment followed a 1.5 percent surge in the first quarter, when mild weather prompted the construction industry to bring forward building projects. The 0.4 percent drop in retail sales followed a 0.9 percent fall in June.

Government spending rose 0.5 percent in the three months through June after a 0.3 percent gain in the previous quarter, according to today's report. Exports fell 0.4 percent. From a year earlier, the economy expanded 1.4 percent, less than the 1.5 percent initial estimate.

Even with the weaker economic growth, the ECB in July raised its key rate to 4.25 percent to curb price growth. While inflation eased in August to 3.8 percent from 4 percent, it remains almost twice the ECB's 2 percent limit. The ECB staff projections for inflation in 2008 and 2009 may be raised tomorrow after the governing council meeting, according to Lehman's Bilke.

While the stronger euro against the dollar and record oil prices threatened growth this year, those pressures may be fading. The euro, whose gains eroded export competitiveness, has fallen 7.5 percent versus the dollar in the last month, while crude oil has dropped around 25 percent since reaching a record $147.27 a barrel on July 11.

Still, an index of consumer and executive confidence in the economy dropped more than forecast last month, according to the European Commission. Europe's manufacturing and service industries contracted for a third month in August, according to reports this week.

European Investment, Spending Drop as Economy Shrinks,
9/3/2008 5:56:53 AM