Europe's economy slows

It looks like a strong recovery from the rock bottom after the Lehman crisis has ended at last across the globe. First, let's look at Europe's economy as a whole, which grew 0.4% in the third quarter, slowing from the previous quarter's 1.0%.

Europe's economic growth weakened in the third quarter from the fastest pace in four years as governments' austerity measures to cut record budget deficits dented the recovery.

Gross domestic product in the 16-nation euro area rose 0.4 percent from the second quarter, when it increased 1 percent, the European Union's statistics office in Luxembourg said today. Economists expected a gain of 0.5 percent, the median of 35 estimates in a Bloomberg News survey showed. Industrial output fell 0.9 percent in September from the previous month, the largest drop in 18 months, separate data showed.

Europe's economic expansion is cooling as leaders grapple with how to handle the sovereign-debt crisis, which has pushed Irish bond yields to records and weakened the euro on concern the EU may need to step in. Ireland and Greece have failed to restore economic growth as they contend with bloated deficits and soaring borrowing costs, while Germany's expansion slowed from the record pace in the second quarter.

"The squeeze from fiscal consolidation programs on the periphery will build," said Ken Wattret, chief euro-zone economist at BNP Paribas in London. "That contrast between Germany driven by strong demand for its exports and the periphery really struggling is going to become more rather than less pronounced."

Six-Week Low

The euro sank to a six-week low against the dollar on concerns about the sovereign-debt crisis and slowing economic growth. The European currency, which is set for its biggest weekly loss since August, traded at $1.3689 at 12:01 p.m. in London, up 0.2 percent on the day.

German GDP increased 0.7 percent from the previous three months, when it surged a record 2.3 percent, while third-quarter growth in France slowed to 0.4 percent from 0.7 percent in the prior period, the statistics office said. Italy's expansion slowed to 0.2 percent from 0.5 percent and the Netherlands' economy contracted 0.1 percent following growth of 0.9 percent in the prior quarter.

Greece's economy contracted 1.1 percent in the latest three months and Spain stagnated, today's data showed. Portugal's growth accelerated to 0.4 percent in the quarter from 0.2 percent in the previous three months. The statistics office didn't publish data for Ireland.

New Mechanism

Group of 20 leaders meeting in Seoul discussed Ireland's debt crisis, and European finance ministers there sought to reassure bondholders about a new system to handle future crises in euro-area nations. Bonds of Ireland and Portugal have tumbled since EU leaders on Oct. 29 backed a German demand to set up a permanent debt-rescue mechanism by 2013. Germany wants bondholders to foot part of the cost of any future crisis.

"Any new mechanism would only come into effect after mid- 2013 with no impact whatsoever on the current arrangements," the ministers of Germany, France, Italy, Spain and the U.K. said in a statement in Seoul. The G-20 leaders endorsed gradual changes in exchange rates and agreed to develop early-warning indicators to monitor policies that exacerbate trade imbalances.

From a year earlier, euro-area GDP rose 1.9 percent, the same rate as the second quarter, today's report showed. The statistics office will publish a detailed breakdown of the data on Dec. 2. The report also showed the U.S. economy grew 0.5 percent in the third quarter, based on an EU measure.

'Big Probability'

Europe's recovery may be restrained as governments step up budget cuts to reduce deficits and restore investor confidence. The yield premium on Irish and Portuguese 10-year debt over the equivalent German security rose to records this week on investor concern that they won't be able to fund themselves.

Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said on Nov. 8 there's a "big probability" that Ireland and Portugal will turn to the EU and the International Monetary Fund for help unless "markets suddenly calm down."

The European Central Bank kept its benchmark interest rate at a record low of 1 percent on Nov. 4 and President Jean-Claude Trichet signaled that the bank will stick to its exit strategy even as a faltering economy makes it harder for governments to plug shortfalls. The ECB has purchased government bonds and provided banks with emergency liquidity to bolster lending.

In the U.S., the Federal Reserve last week decided to buy more assets to prop up the world's largest economy. The Bank of Japan said on Nov. 5 that the recovery "seems to be pausing" after pledging to keep borrowing costs near zero.

Mounting Debts

Concern about governments' ability to push down mounting debts sparked a 15 percent drop by the euro against the dollar in the first half of the year, helping to boost exports. HeidelbergCement AG, the world's No. 3 maker of cement, said on Nov. 4 that third-quarter profit more than doubled. Daimler AG, the world's second-biggest maker of luxury vehicles, last month increased its full-year earnings forecast.

European companies remain dependent on faster-growing economies in emerging markets to bolster earnings as euro-area unemployment at a 12-year high restrains consumer spending. Continental AG, Europe's second-largest car-parts maker, on Nov. 3 raised its 2010 forecasts, citing demand in Asia and South America. L'Oreal SA, the world's largest cosmetics maker, said in October that nine-month sales in Western Europe lagged other markets.

"It's clear that the budget consolidation and weaker global demand are weighing on an expansion," said Carsten Brzeski, a senior economist at ING in Brussels. "But we're still far from a double-dip recession."

Budget Consolidation

Industrial production in the euro region rose 5.2 percent in September from a year earlier after jumping 8.4 percent the previous month, today's report showed. Production of durable consumer goods declined 3 percent from August, while output of intermediate goods fell 1.3 percent.

Nations such as China and Brazil are powering the global expansion, widening a gap with advanced economies that are struggling to revive domestic demand. The Washington-based IMF said on Oct. 6 that developing nations will grow 6.4 percent next year, almost three times the pace projected for industrialized economies including Europe and the U.S.

"The recovery which is there, obviously, is uneven because there's a significant difference between emerging economies and advanced economies," Trichet said on Nov. 8 after a meeting with global counterparts. "There is a degree of uncertainty."

What's notable here is that, according to the report, "governments' austerity measures to cut record budget deficits dented the recovery." Now, what about Germany? The biggest economy in Europe also grew less than the previous quarter.

German economic growth slowed in the third quarter, after record expansion in the second, as the cooling global recovery crimped export demand.

Gross domestic product, adjusted for seasonal effects, rose 0.7 percent from the second quarter, when it surged an upwardly revised 2.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted the economy would expand 0.8 percent, the median of 37 estimates in a Bloomberg News survey shows. Separately, France said GDP rose 0.4 percent in the third quarter after a 0.7 percent gain in the second.

Germany is driving growth in the 16-nation euro area as debt-strapped countries such as Ireland, Portugal and Greece grapple with a loss of investor confidence in their ability to finance themselves. Germany's economy, Europe's largest, will expand 3.7 percent this year, the government's council of economic advisors forecast this week. That would be the fastest growth since 1991.

"This is an incredible number for Germany," Andreas Scheuerle, an economist at Dekabank in Frankfurt, said of the third-quarter report. "Consumption has picked up, investment is strong. What else do you want? We're expanding at high speed and twice our potential."

Weber's Prediction

Growth also exceeded the expectations of Bundesbank President Axel Weber, who said on Oct. 25 the economy would expand about 0.5 percent in the third quarter. The euro was little changed after today's data, trading at $1.3637 at 9:48 a.m. in Frankfurt.

The statistics office said trade and investment as well as household and government spending all contributed to growth in the third quarter. From a year earlier, GDP increased 3.9 percent. Second-quarter growth was revised from 2.2 percent.

"Some might label today's growth rate as a slowdown, in our view 'normalization' suits better," said Carsten Brzeski, an economist at ING in Brussels. "The impressive second-quarter performance was a one-off and will not be repeated any time soon."

Euro-area growth probably slowed to 0.5 percent in the third quarter from 1 percent in the second, according to another Bloomberg survey of economists. Eurostat, the European Union's statistics arm in Luxembourg, will publish that data at 11 a.m. today.

The Austrian economy expanded 0.9 percent in the third quarter after growth of 1.2 percent in the second. Holland's contracted 0.1 percent following growth of 0.9 percent.

Widening Gaps

The region's sovereign debt crisis is widening the gaps between its members. Greece's economy probably shrank 4.3 percent in the third quarter, its seventh quarterly contraction, and Portugal's GDP may drop 0.1 percent, economist surveys show.

That may force the European Central Bank to leave stimulus measures and record-low interest rates in place longer than necessary for Germany, where falling unemployment is boosting prospects for consumer spending.

"If you look at growth, the labor market and government finances in Germany, these all suggest it would normally soon need a rate hike," said Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam. "But of course the ECB can't separate it from the rest of the euro zone. The government might need to do more fiscal tightening if they want to prevent the economy from overheating."

Germany's Siemens AG, Europe's largest engineering company, yesterday announced a bigger-than-estimated increase to its dividend for 2010.

'Full Momentum'

"We're coming out of the economic downturn with full momentum," Siemens Chief Executive Officer Peter Loescher said. "Our growth is gaining speed. We expect to take this positive momentum into the next fiscal year."

Bayerische Motoren Werke AG, the world's top maker of luxury vehicles, raised its 2010 forecast after reporting an 11- fold jump in third-quarter profit. Bilfinger Berger, Germany's second-largest construction company, has lifted its outlook for 2010, and luxury clothier Hugo Boss AG reported a 79 percent jump in third-quarter profit.

The cooling global economy and a stronger euro may damp exports. The International Monetary Fund forecasts global growth will slow to 4.2 percent next year from 4.8 percent this year. In China, economic expansion eased in the three months through September, and the U.S. Federal Reserve is buying an additional $600 billion of Treasuries to bolster its ailing economy.

That's helped the euro advance 14 percent against the dollar since early June, threatening export price competitiveness outside the euro region. Within the currency zone, Germany's biggest export market, governments are cutting spending and raising taxes to push down budget deficits.

Still, Germany has become "less dependent on exports and, encouragingly, more reliant on domestic demand," said Alexander Koch, an economist at Unicredit in Munich. "Investment activity will pick up further. Above all, consumer expenditure has risen markedly."

This Bloomberg report sees the reason for slower growth as the abating global recovery which reduced the country's exports. But some has a different opinion. An economist at ING is quoted to say, "Some might label today's growth rate as a slowdown, in our view 'normalization' suits better." Also, another economist brags that Germany is now "less dependent on exports and, encouragingly, more reliant on domestic demand."

Is that really so?

Second thought would be required to assess the current condition of German economy. As my previous post showed, exports' share is close to 50% in Germany's GDP, and its contribution to GDP growth exceeds GDP growth itself much more, meaning that Germany is heavily dependent on exports for development. Given that the country is now on the way to cutting budget deficit and the euro is on a high plateau, "normalization" would sound like a petty consolation.