Eurozone Growth Revised Down as Inflationary Pressures Trump Economic Growth

Source: http://feeds.feedburner.com/~r/USMoneyMorning/~3/331096740/
Posted on Wednesday, July 9th, 2008 | In Current Market News, Economics, Europe, Spain, Stocks to Watch

Contributed by: Money Morning (http://moneymorning.com) -

By Jason Simpkins
Associate Editor

First-quarter growth in the 15-nation Eurozone was weaker than first reported, yet another worrying development for a region already struggling with soaring inflation.

The combined Eurozone economy grew by 0.7% in the first quarter compared to the three months prior, revised down from a previous forecast of 0.8%, Eurostat reported. While the figure is still relatively strong, a U.S. slowdown, rampant inflation, and low consumer demand could drag the economy down even further in the second half of the year.

The European Commission’s gauge of consumer confidence declined to a level of -17 in June from -15 in May. Economic sentiment declined to 94.9 from 97.6 in May. Much of the decline was attributed to a steep rise in Eurozone inflation, which hit a 16-year high of 4% in June.

“The surge in food and energy prices is clearly squeezing the life out of the consumer side of the economy,” said Ken Wattret of BNP Paribas SA (OTC ADR: BNPQY) told Thomson Financial.

The European Central Bank (ECB) voted to raise its main interest rate last week to 4.25% in an attempt to subdue inflationary pressures, but ECB President Jean-Claude Trichet isn’t convinced the quarter-point hike will be enough.

“Risks to price stability over the medium term remain clearly on the upside… and have intensified in recent months,” he told legislators in Strasbourg, France.

“The Governing Council is strongly concerned that price and wage-setting behaviour could add to inflationary pressures through broadly-based second-round effects. First signs are already emerging in some regions of the euro area,” he said.

However, any further action could severely jeopardize an economy that is clearly starting to limp, particularly as the U.S. rate remains as low as 2%. The euro’s continued strengthening against the dollar has adversely affected European exports and could further endanger the Eurozone’s two biggest economies, France and Germany, which each suffered in May with exports plummeting 1.7% and 3.2% respectively.

“I have the right as president of the French republic to wonder if it is reasonable to raise the European rates to 4.25 percent while the Americans have rates of 2.0 percent,” French President Nicolas Sarkozy said in Paris on Saturday.

Meanwhile, Spain is on the brink of a possible recession, as a housing slump similar to that being experienced in the United States and Britain has racked the country. Spain’s gross domestic product (GDP) has grown at an average annual rate of 3.75% for the last decade but the collapse of a housing bubble has left the economy in disarray.

In 2006, more than 700,000 houses were built in Spain,
The Wall Street Journal reported, more than France, Germany, and the United Kingdom combined. And investment in housing accounted for 10% of the country’s GDP, more than twice the Eurozone average.

However, a large accumulation of debt and tighter credit conditions caused the housing boom to grind to a halt. Now, analysts anticipate fewer than 300,000 homes will be built in Spain this year.

Spanish retail sales fell 5.3% in May, The Journal reported, and unemployment shot up to 9.9%. GDP growth in the country slumped to 0.3% in the first quarter, down from 0.8%.

“There’s a high likelihood the [Spanish] economy could be in recession at the end of the year,” Fernando Eguidazu, vice chairman of the Circulo de Empresarios business association told journalists Monday.

Stagnation or contraction in the Spanish economy could shave as much as 0.1% off the region’s quarterly growth rate, according to Holger Schmieding, Bank of America Corp.’s (BAC) chief European economist. Schmieding expects Eurozone growth will drop to 0.2% in the third and fourth quarter.

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