Recession deepens in Europe

By bne IntelliNews May 15, 2009

Nicholas Watson in Prague -

Dire GDP data for Europe show that the continent is far from out of the woods and worries are growing that the recent green shoots of recovery could be nipped in the bud.

The EU's statistics office in Luxembourg said GDP in the first quarter among the 16 nations that are members of the single currency contracted 2.5% from the fourth quarter and 4.6% from the year before, the most since the data were first compiled in 1995.

The contraction was led by the worst German GDP figures since quarterly data was first compiled in 1970. Seasonally adjusted GDP fell by a much worse-than-expected 3.8% in the first quarter from the fourth quarter, when it fell 2.2%, the Federal Statistics Office in Wiesbaden said.

This gruesome data was matched in emerging Europe.

In Romania, real GDP contracted by a huge 6.4% on year in the first quarter, more than double the minus 2.5% consensus, and down from the 2.9% growth reported in the fourth quarter and the 7.1% growth reported for the full year in 2008. "Policymakers in Romania, and indeed generally elsewhere in the region, have been in denial as to how serious the global crisis would impact on their economies, arguing that their cheap skilled labour base and low tax regimes would still stand them in good stead, and would continue to attract net foreign direct investment - some have argued that net FDI into the region would accelerate which is clearly a ridiculous assertion," says Tim Ash of Royal Bank of Scotland.

In the Czech Republic, GDP contracted by 3.4% on year in the first quarter, the largest quarterly year-on-year decrease ever. While the Czech economy's fundamentals are arguably still amongst the strongest in the region, its open economy and reliance on the car industry has left it vulnerable to the collapse in next-door Germany.

Likewise, neighbouring Slovakia, the "Detroit of Europe," posted a 5.4% contraction in the first quarter, much worse than the 2.0% contraction assumed by the market and the 2.5% real growth posted in the fourth quarter of last year. This makes the European Commisson's forecast for a 2.6% real GDP contraction in 2009 for Slovakia appear optimistic.

In Bulgaria, GDP contracted by 3.5% on year in the first quarter, worse than the minus 2% market consensus and the 3.5% real GDP growth reported in the fourth qurater. "The government has been plying the line that the economy should be relatively insulated from the global crisis, but the data just affirms that no one is safe," says Ash. "Bulgaria's fixed exchange rate regime, which has left the lev amongst the most over-appreciated currencies in the region, leaves it especially vulnerable; albeit the strong fiscal position (hefty fiscal reserves, with almost no net public sector debt) provides some wiggle room."

Ironically Hungary, one of the worst affected countries in emerging Europe and the first to turn to the International Monetary Fund (IMF) for a bailout, posted a slightly better-than-expected GDP contraction of 6.4% on year, compared with the consensus 7% on-year contraction.

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