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Eurozone Enters First Recession, U.S. to Follow

By , Money Morning •

By Jason Simpkins
Associate Editor
Money Morning

The Eurozone – the 15 countries that use the euro – has officially slipped into its first recession, as the region’s gross domestic product (GDP) contracted by 0.2% in both the second and third quarters of 2008. Analysts anticipate the recession will carry into 2009 before easing and induce another round of rate cuts from the European Central Bank (ECB).

Germany, Italy and Ireland have already officially entered into recessions, posting back-to-back quarters of negative growth. France narrowly avoided a recession with third-quarter growth of 0.1%. The economy of 27-nation European Union (EU) also shrank by 0.2% in the three months ended September.

“Historically, recessions preceded by episodes of banking-related financial stress have tended to be more profound and long-lasting,” Martin van Vliet, an economist at the Dutch bank ING told the New York Times. “Consequently, it seems overwhelmingly likely that the current, credit-crisis induced downturn is going to be more painful than the previous one in 2001 to 2002, after the dotcom bubble burst.”

The Organization for Economic Cooperation and Development (OECD) predicts that the Eurozone economy will contract 0.5% in 2009, in line with the International Monetary Fund's (IMF) most recent forecast.

Analysts expect the European Central Bank to counter the decline with more interest rate reductions, possibly another half point cut in December. The ECB has launched its most aggressive rate-cutting campaign in its 10-year history, slashing its benchmark rate twice by half a percentage point within a month.

ECB President Jean-Claude Trichet has brought the rate down to its current level of 3.25% after raising it to a seven year high of 4.25% in July – a time when the Eurozone was already three months into a recession. At the time inflation stood at a record-high 4%, but with the recent drop in commodities prices, it has cooled significantly. Eurozone inflation receded to a rate of 3.2% in October – a nine-month low.

With two consecutive quarters of 0.2% negative growth, the Eurozone is actually faring worse than the United States, which posted 0.7% growth in the second quarter and just a 0.1% decline in the third.

However, few analysts expect that dynamic to endure throughout 2009. The OECD estimates that the Eurozone economy will contract by 0.5% in 2009, versus a 0.9% decline in the United States.

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