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A very severe recession in the euro zone

5. Februar 2009

Die Euroframe-Gruppe führender europäischer Konjunkturforschungsinstitute schätzt monatlich die Entwicklung des Bruttoinlandsprodukt für die Euro-Zone im aktuellen und nächsten Quartal. Nach der Februar-Auswertung schrumpft die Euro-Wirtschaftsleistung im ersten Quartal bereits um 2 Prozent gegenüber Vorjahr. Hier ist die Analyse von Paavo Suni von ETLA Research Institute of the Finnish Economy, einem der Euroframe-Institute.

The Eurogrowth Indicator, calculated by EUROFRAME confirms the deep recession predicted by the indicator already in December 2008. The Indicator predicts year-on-year GDP growth rates of -1.2 and -2.1 percent for the Euro Area in the fourth quarter of 2008 and the first quarter of 2009. On quarter-on-quarter terms, these numbers imply a 3.5 per cent average annualised fall in GDP. Such a fall would be the steepest in the history of the Euro Area since 1999. For the record, in the third quarter the indicator was very accurate.

The new growth estimates are somewhat higher than the ones published in January. The large negative contribution of the retail trade factor increased further as domestic demand has been hit hard by the financial crisis. The industrial factor deteriorated as steeply and strongly as in January. The recent sharp fall in interest rates and the weakening of the euro against the USD only affect the Indicator with a two quarter lag. For the time being interest rates continue to deteriorate the growth estimates, but fairly soon this negative effect will disappear.

The Indicator also shows, using ISM data from the US, a drastic contraction in external demand for Euro Area products and services since September and the explosion of the financial crisis. In the fourth quarter of 2008, the weak export demand had a negative contribution of close to 1.5 percentage points to the GDP estimate. In the first quarter of 2009, the contribution stayed deeply negative even though it recovered somewhat thanks to a small improvement in the ISM index from the 28-year low in December 2008, which may anticipate demand support from the planned large stimulus package.

The indicator points to 0.8 per cent GDP growth in 2008 and a very bad start for 2009. Therefore, in 2009, GDP will contract by 1.5 per cent even in the optimistic and unlikely scenario that the first quarter GDP level can be maintained throughout 2009, Thus, the Euro Area is bound to experience a severe depression, if the decline in GDP does not soon come to a halt with economic policy measures.

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