July 11 (Bloomberg) -- The euro-region's economy probably contracted in the second quarter for the first time since the single currency was set up almost a decade ago, said economists at Citigroup Inc., JPMorgan Chase & Co. and Barclays Capital.

The 15-nation economy is buckling as record oil prices, a stronger euro and a global slowdown take their toll on growth, data showed this week. Exports and industrial output fell in May in Germany and France, while companies including Heidelberger Druckmaschinen AG and Renault SA said they're cutting jobs or sales targets.

While Europe may still avoid its first outright recession in 15 years, further pain may be on the way for consumers and executives. European Central Bank President Jean-Claude Trichet is refusing to give up the bank's fight against the worst bout of inflation in a generation and raised interest rates last week just as a housing-market slump worsens in parts of the euro- area.

``The ECB will get its way on inflation, but at the cost of the economy slowing to the brink of recession or worse,'' said Julian Callow, chief European economist at Barclays Capital in London. He estimates the economy shrank 0.1 percent in the last quarter and will expand 0.3 percent in each of the following three-month periods. It expanded 2.7 percent last year.

The euro-region's economy may display further evidence of cooling next week. Industrial output probably fell 2.3 percent in May, the most since 1989, according to a survey of economists by Bloomberg News. German investor confidence probably slid to the lowest in almost 16 years, according to another survey.

Confidence

The European Union's statistics office will publish the production report on July 14 and the ZEW Center for European Economic Research will release its figures a day later.

Weakness in peripheral economies such as Spain and Ireland is spreading to the euro-area's core as the currency's rally against the dollar and the pound crimps exports. French industrial output fell by the most since 2005 in May and exports declined 1.7 percent, data showed this week. Shipments from Germany, the world's biggest exporter, fell the most in almost four years.

``All these data have the same direction: down,'' said Juergen Michels, an economist at Citigroup in London who predicts the economy shrank 0.2 percent last quarter after jumping 0.7 percent in the first three months of the year. He estimates growth of about 0.3 percent in the current quarter, which he said is slower than the ECB had expected.

Avoid Recession?

Renault, France's second-largest carmaker, on July 9 abandoned its sales goal for 2008 and said revenue in the second half ``will depend to a large extent on economic and financial developments, still highly uncertain.'' Heidelberger Druck, the world's largest printing-press maker, said yesterday it plans to eliminate 500 jobs as demand deteriorates and the cost of metals rises.

``We don't have visibility until the end of the year,'' Heidelberger Druck's Chief Executive Officer Bernhard Schreier said yesterday. The euro has gained 15 percent against the dollar and 18 percent against the pound in the last year.

The European economy may still avoid recession given growth in the first quarter was boosted by weather, holidays and the end of strikes, said Silvia Pepino, an economist at JPMorgan in London. Still, she now estimates the economy contracted 0.8 percent last quarter and will ``stagnate for about a year'' with an expansion of 0.3 percent in the second half of 2008, less than the 1.2 percent she previously forecast.

Individual nations may not be so lucky in avoiding the two consecutive quarters of negative growth that define a recession. As their housing markets collapse, the economies of Ireland and Portugal already contracted in the first quarter.

`High Risk'

Among the larger economies, Spain is probably already in recession and France is at ``high risk'' of following, Commerzbank AG economist Ralph Solveen said today. Italy's economy will likely stagnate, while Germany has the best chance of a so-called soft landing, he said.

The slowdown may not persuade the ECB to start cutting rates. The bank last week raised its benchmark rate to 4.25 percent after consumer prices surged 4 percent in June, double the ECB's ceiling.

Trichet said yesterday that ``a lot'' depends on anchoring inflation expectations as they ``remain above the level consistent with price stability for longer than we previously thought.'' Executive Board member Jose Manuel Gonzalez-Paramo said the previous day the bank will ``act as necessary'' to prevent inflation form pushing up wages.

While Stephane Deo, chief European economist at UBS AG, today cut his forecast for growth next year to 1.1 percent from 1.3 percent, he predicted the ECB will raise rates again in September.

``With inflation still on the upside and the risks of second-round effects increasing, we believe the ECB is likely to hike again,'' Deo said. Still, ``very low growth and limited second-round effects should place the economy in a very different position next year.''

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net.

Last Updated: July 11, 2008 05:46 EDT