Crisis plunges EU into recession

Channel News Asia
Crisis plunges EU into recession
Posted: 03 November 2008 2309 hrs

BRUSSELS: The global financial crisis is pushing the whole European Union into recession, official forecasts said on Monday, as South Korea unveiled its own 8.5 billion dollar stimulus package against the turmoil.

The European Commission forecast a short shallow recession for the 27-nation EU, predicting the bloc's combined economy would shrink 0.1 per cent in both the third and fourth quarters of 2008.

"The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumer confidence," said EU Economic Affairs Commissioner Joaquin Almunia.

The forecast by the EU's executive arm also said the economy of the 15 nations that use the euro shrank 0.2 in the second quarter and is set to contract by 0.1 per cent in both the third and fourth quarters.

It is the first time that the eurozone has slumped into recession -- which economists broadly define as two consecutive quarters of economic contraction -- since the single currency was introduced in 1999.

In the face of sharply slowing growth, the commission forecast unemployment would return as a major headache after a steady decline in recent years.

It predicted that the unemployment rate in the eurozone would creep up from a record low of 7.2 per cent in March to 8.7 per cent in 2010.

The impact of the slowdown was highlighted by a year-on-year 7.3 per cent fall in new car sales in France, according to official figures for October.

The motoring sector employs, directly or indirectly, 10 per cent of the French workforce, and companies have ordered massive production cuts, with several plants temporarily shuttered.

Despite the grim forecast, Europe's main stock markets rose at the start of the working week, with London's FTSE 100 index up 0.87 per cent in early trade.

Frankfurt's DAX 30 advanced 1.32 per cent while in Paris the CAC 40 gained 0.74 per cent.

The European markets tracked similar gains in Asia, where Hong Kong's Hang Seng index closed 2.7 per cent higher and Australian shares rose 5.06 per cent by close. Tokyo was closed for a public holiday.

Analysts said the markets were closely watching the lead-up to Tuesday's US presidential election, with polls giving Democrat Barack Obama a sharp edge over Republican John McCain.

"We expect the new US president will become an integral force in policymaking even before his official inauguration in January," said Bank of America chief economist Mickey Levy.

But despite the rises on the stock markets, fears of recession loomed large, with South Korea unveiling a stimulus package to cushion the blow of the financial crisis.

The Seoul government, saying it expected a significant slowdown in exports, promised an extra 11 trillion won (8.5 billion dollars) in spending next year as well as tax cuts of three trillion won to boost sagging domestic demand.

The strategy and finance ministry said the prospects of a swift turnaround in the global financial turmoil appeared dim, and reduced its economic growth forecast for 2009 to around four per cent from close to five per cent.

The turmoil that started out in the US subprime mortgage credit crunch "is causing concern over a global economic downturn," the minister of strategy and finance, Kang Man-Soo, told reporters.

South Korea's KOSPI index ended the day up 1.5 per cent on the package.

Separately, Chinese Prime Minister Wen Jiabao said China would take a hit from the crisis and that inflation remained a serious challenge.

"The global financial turmoil and the economic downturn are getting worse," Wen wrote in a signed article in Qiushi, a journal published by the Communist Party.

China's growth slowed to nine per cent in the third quarter of this year -- the lowest quarterly figure since the second quarter of 2003.

- AFP/yt