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Euro Region’s Contraction Led by Consumers, Investment: Economy

Europe’s economy was pushed into a contraction in the second quarter as consumers cut spending and corporate investment slumped.

Gross domestic product in the 17-member euro area fell 0.2 percent from the first quarter, the European Union’s statistics office said, confirming an initial estimate published on Aug. 14. Gross fixed capital formation dropped 0.8 percent from the previous three months, when it fell 1.3 percent, while consumer spending was down 0.2 percent. Government-spending growth slowed to 0.1 percent from 0.2 percent.

The Organization for Economic Cooperation and Development called today on officials to do more to tackle the region’s debt crisis, which will continue to weigh on growth and confidence. European Central Bank President Mario Draghi may unveil details of a plan later today to purchase government bonds to lower borrowing costs of Italy and Spain and prevent a euro breakup.

“The slowdown will persist if leaders fail to address the main cause of this deterioration, which is the continuing crisis in the euro area,” said OECD Chief Economist Pier Carlo Padoan. “Resolving the euro area’s banking, fiscal and competitiveness problems is still the key to recovery.”

Weak Confidence

Europe’s economy has probably slipped into a recession as the worsening fiscal crisis undermines sentiment among companies and consumers. Economic confidence dropped more than economists forecast in August and German unemployment increased.

Euro-region exports rose 1.3 percent in the second quarter from the previous three months, when they advanced 0.7 percent, today’s report showed. Imports increased 0.9 percent in that period after declining 0.2 percent.

In Germany, Europe’s largest economy, GDP rose 0.3 percent in the second quarter, down from 0.5 percent in the previous three months. France’s economy stalled, while Italy’s GDP dropped for a fourth straight quarter. In Spain, which locked in a bank bailout earlier this year, GDP fell 0.4 percent. The economies of Cyprus, Belgium and Portugal also contracted.

Moody’s Investors Service said on Aug. 30 that downside risks to the global recovery this year and next have increased. Growth in 2012 will be “materially lower” than last year, with the euro region’s fiscal crisis posing the biggest risk to the outlook, the ratings company said.

‘More Challenging’

Europe’s economy may have continued to shrink in the third quarter, putting it back into its first recession in three years. French unemployment rose to a 13-year high of 10.2 percent in the second quarter, according to a report today. Excluding France’s overseas territories, it 9.7 percent.

Siemens AG (SIE), Europe’s largest engineering company based in Munich, on Aug. 27 announced 500 further jobs cuts to counter waning demand. Commerzbank AG Chief Executive Officer Martin Blessing yesterday forecast a “more challenging” second half.

“We will feel the ripple effects of the sovereign debt crisis for many years,” he said. “We will see a decline in profitability. Cost cutting and constant process improvement is gaining importance.”

The OECD, which advises its 34 member governments on economic policy, today cut its GDP forecasts for the main euro- area economies. Germany will expand 0.8 percent this year instead of the 1.2 percent predicted in May, while France will expand 0.1 percent instead of 0.6 percent and Italy will shrink 2.4 percent instead of 1.7 percent, it said.

“The loss of momentum at the G-7 level may persist throughout the latter half of this year,” the OECD said in the report. “With the euro-area crisis still the most important risk for the global economy, further policy action is needed to instill more confidence in monetary union.”

Interest Rates

The ECB left its benchmark interest rate unchanged at 0.75 percent today. Draghi will hold a press conference at 2:30 p.m. in Frankfurt. The ECB’s plan involved purchasing short-dated bonds on the secondary market of countries that ask Europe’s bailout fund to buy their debt on the primary market. Neither Spain nor Italy have made such a request.

“I really compliment the ECB leadership for recognizing six weeks ago the scale of the challenge that they have to address,” Jim O’Neill, chairman of Goldman Sachs Asset Management said on Bloomberg Television yesterday. “It’s a pretty strong sign that the ECB is telling us all they’re going to do what is necessary to make sure people don’t think the euro is coming to an end.”

Riksbank Cuts

Earlier today, Sweden’s Riksbank cut its benchmark rate for the first time since February, caving in to calls from exporters, as the krona’s strength and deepening euro crisis threaten the nation’s trade competitiveness. The repo rate was lowered by a quarter point to 1.25 percent. The Bank of England left its bond-purchase target at 375 billion pounds and its key rate at 0.5 percent.

Elsewhere, the economic committee of Vietnam’s National Assembly said in a report published yesterday that the country risks “prolonged stagnation” unless it acts quickly to clean up bad debt, and it may need International Monetary Fund aid to recapitalize its banks. The financial system needs an injection of 250 trillion dong ($12 billion) to 300 trillion dong, according to the 298-page report that included recommendations to address economic risks.

In the Asia-Pacific region, Australia’s jobless rate unexpectedly declined in August and in South Korea the central bank said the economy expanded 0.3 percent in the second quarter from the previous three months, less than initially estimated.

U.S. unemployment claims probably fell to 370,000 in the week ended Sept. 1, according to the median forecast of 48 economists surveyed by Bloomberg News. The Labor Department will publish the data at 8:30 a.m. in Washington.

To contact the reporters on this story: Simone Meier in Zurich at smeier@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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