Dec. 4 (Bloomberg) -- European investment fell for a second quarter and consumer spending stagnated as the global financial crisis dragged the region into a recession that pushed central bankers into a third interest-rate cut within two months.

Gross domestic product shrank 0.2 percent from the second quarter, matching an initial estimate, the European Union’s Luxembourg-based statistics office said today. Investment fell 0.6 percent in the first back-to-back decline since 2002, and household spending stagnated after dropping 0.2 percent in the previous quarter.

“The downturn we see now is without recent comparison and is developing much faster and deeper than expected,” Royal Philips Electronics NV Chief Executive Officer Gerard Kleisterlee said today. “The speed and ferocity by which the weakening economy is affecting demand in key markets is now also taking its toll” on Europe’s largest maker of consumer electronics.

The European Central Bank today cut its key rate by three quarters of a percentage point, the biggest reduction in its 10- year history. ECB President Jean-Claude Trichet told a press conference after the rate decision that the European economy will contract next year.

Economists were divided on how much the ECB would cut, with 35 of 56 surveyed by Bloomberg News predicting a 50-basis-point reduction and 21 forecasting 75 points or more. The Frankfurt- based ECB has now lowered its key rate from 4.25 percent since early October, having increased the rate as recently as July as record oil prices boosted inflation. Crude oil has dropped by two-thirds since July to less than $50 a barrel.

Key Rate

The euro has dropped 20 percent against the dollar from a July peak of $1.60. It was little changed after today’s rate decision and traded at $1.2659 at 2:15 p.m. in London.

Europe’s economy is suffering from multiple shocks that have dragged consumer and executive confidence to a 15-year low and led to a slump in manufacturing and services activity. From a year earlier, expansion slowed to 0.6 percent in the third quarter, the weakest in five years, from 1.4 percent in the prior three months, according to today’s report.

Exports rose 0.4 percent in the third quarter from the prior three months, while imports surged 1.7 percent. Net trade knocked 0.5 percentage points off quarterly growth.

After facing record levels for the euro and oil prices earlier this year, the cost of credit then surged after the collapse three months ago of New York-based Lehman Brothers Holding Inc., which forced banks to cut lending to businesses and households and curbed demand for euro-area exports.

‘Serious Recession’

Europe is facing a “very serious recession,” said Holger Schmeiding, chief European economist at Bank of America in London. “Despite a major monetary stimulus and some help from lower oil prices and a looser fiscal policy, we do not expect the economy to recover before late 2009.”

Philips, Europe’s largest maker of consumer electronics, said today it won’t meet its goal of doubling earnings per share by 2010. Semiconductor maker Infineon Technologies AG, yesterday forecast revenue will drop this fiscal year because of sliding orders from automakers and mobile-phone manufacturers.

As well as a monetary stimulus, the European Commission is trying to coordinate 200 billion euros in fiscal measures among its member states to spur growth.

The economic crisis isn’t unique to the euro area, with the International Monetary Fund predicting the U.S., Europe and Japan will all contract next year, the first simultaneous downturn since World War II.

First Decline

The U.K. economy shrank in the third quarter for the first decline in 16 years and the Bank of England today lowered its benchmark interest rate by one percentage point to 2 percent, the lowest level since 1951. New Zealand reduced rates by a record 150 points overnight and Sweden today lowered its key rate by 175 points, the biggest reduction since 1992.

The U.S. economy, the world’s largest, entered a recession a year ago this month, the panel that dates American business expansions said on Dec. 1. Japan’s economy shrank last quarter, entering the first recession since 2001.

As growth slumps and commodity prices fall, that has sparked concern over deflation. Luigi Speranza, an economist at BNP Paribas in London, said this week that while deflation is not in his central scenario, its risks “should not be overlooked.”

European Monetary Affairs Commissioner Joaquin Almunia has discounted the threat, saying there is no “real risk.” Schmieding at Bank of America agrees.

“A genuine deflation caused by a persistent shortfall in demand as consumers hold back from buying now because they expect goods and services to be cheaper in the future is highly unlikely,” he said. “It would probably take a severe three-year recession to get the somewhat sticky euro-zone price level there.”

To contact the reporter on this story: Fergal O’Brien in Dublin at fobrien@bloomberg.net.

Last Updated: December 4, 2008 09:21 EST