In Europe, Economic Signs Point to a Recovery

In Europe, Economic Signs Point to a Recovery
By CARTER DOUGHERTY
Copyright by The New York Times
Published: August 13, 2009
http://www.nytimes.com/2009/08/14/business/global/14euro.html?_r=1&ref=global-home


FRANKFURT — The European economy bounced back with unexpected strength in the second quarter after contracting sharply at the beginning of 2009, data released Thursday showed. The statistics offered the clearest evidence yet that a searing recession would probably become a very modest expansion later this year, but many economists believe that the European recovery could slacken or stall in 2010.

The economy of the 27-nation European Union shrank 0.3 percent in the three months through June, or at an annual rate of roughly 1.2 percent. The 16 countries that use the euro, the common European currency, registered a 0.1 percent decline in activity for the second quarter, an annual rate of roughly 0.4 percent.

The dramatic easing of the recession put Europe roughly on par with the United States, where the economy shrank at an annual pace of 1 percent during the same period. That reflected the ebbing of an acute shock that rippled through economies worldwide after the collapse of Lehman Brothers and the subsequent chaos in financial markets.

However, economists expect a divergence in performance between the United States and Europe next year as lagging efforts to repair a damaged banking system in key countries like Germany and sharply rising unemployment tarnish the outlook in Europe over the next six months.

“We will really see the difference in recoveries next year,” said Thomas Mayer, chief Europe economist at Deutsche Bank in London. “That will be when the U.S. bounces back more quickly than Europe.”

Signs that both the U.S. and European economies are turning a corner may be good news for Asia’s export-driven economies.

Despite being in negative territory, the European data underscore a sharp recovery from the first quarter of this year, when both the EU and the euro zone saw a 2.5 percent contraction compared to the previous quarter.

Underlying the surprisingly strong reading were solid performances in France and Germany, both of which grew by 0.3 percent in the second quarter, government data showed.

Germany, Europe’s largest economy, will still probably see its gross domestic product contract by about 6 percent for the full year, economists say.

Within the euro area, France and Germany are balancing out much weaker performances in Italy, a perpetual laggard, and Spain, where a collapsing housing market has brought an acute recession. And Eastern Europe — particularly in Hungary and the Baltic economies — remains deeply troubled.

The surprise expansion in Germany — most economists had expected a flat or slightly negative reading — underscores how the country’s exporters are benefiting from growth in Asia and what may be a bottoming of the downturn in the United States. The news comes after four straight quarters of contracting output in Germany, meaning the nation’s recession, its worst since World War II, has technically ended.

Economists are now debating about whether the V-shaped recovery can get traction or whether rising joblessness will drag down consumption and shake consumer confidence, leading to another dip later this year — a so-called W-shaped expansion.

“An export-driven, V-shaped recovery in the second half of this year is in the pipeline,” said Andreas Rees, chief Germany economist at UniCredit in Munich.

But Erik Nielsen, chief Europe economist at Goldman Sachs in London, said: “You might get something resembling a W simply because of the strength of the rebound.

“It’s almost mathematical after the deep trough” in the first quarter, he added.

Other developments are weighing on the European outlook, creating uncertainty about how the economy will shape up in 2010.

News last week that German exports had leapt 7 percent in June over the previous month foreshadowed the positive reading on gross domestic product. But that masked an overall collapse of orders from abroad; German exports in June were down 22 percent compared with a year earlier.

And unemployment is expected to rise sharply later this year as a raft of government programs that kept people on private payrolls throughout Europe begin to expire.

Already, the euro area’s unemployment rate stands at 9.4 percent, its highest level in 10 years, and the anemic growth of the coming quarters will not be enough to arrest the slide. That, in turn, could drag down consumer confidence or even generate a political backlash in Europe, economists said.

“Growth is not going to get where it needs to be to the point where companies do not have to fire their surplus workers,” said Julian Callow, chief Europe economist at Barclays Capital in London.

The financial system is another cloud on the horizon, though it may be healing faster than expected.

The International Monetary Fund has criticized Europe for not moving quickly enough to recapitalize banks and clean balance sheets of bad assets. However, the European Central Bank projects lower losses in Europe than the I.M.F., suggesting a banking recovery is under way.

The most recent data from the E.C.B. suggests credit flows are easing, although individual countries still report problems with longer-term loans. “We have to worry about tighter credit less than we thought we did earlier in the year,” Mr. Callow said.