Saturday, April 26, 2008

Europe Heading Towards Recession

Recently, much of the focus has been on the prospects of the US entering into recession. However, the EU and Eurozone in particular look susceptible to the prospects of a recession.

The effects of the credit crunch are being increasing felt in Europe. However, unlike the US, the Eurozone faces additional difficulties to the economy, not confined to just the credit crunch.
  • Strength of the Euro. The marked appreciation in the Euro is presenting exporters with both rising costs (from oil prices) but also declining competitiveness. Economies such as Germany are particularly reliant on exports, and the strength of the Euro is now harming the manufacturing sector.
  • Attitude of ECB. The ECB has a strong inflationary stance. This means it is reluctant to cut rates and boost the economy. The ECB seems more concerned about the increase in inflation (due to cost push inflation) than it does about the prospects of a downturn in the economy. This contrasts with the US who have cut rates aggressively.
  • Housing Boom and Bust in EU The US is currently experiencing a housing crash, but the EU could also be facing a recession in the housing sector. For example, Spain's housing market looks precarious with houses overvalued. A slump in prices would hit the construction sector, a key element of the Spanish economy.
  • WPP, the world's largest advertising group said advertising revenue for Europe had fallen markedly in the first months of this year (unlike US where revenues had stayed constant) [1]
The UK economy is currently growing at about 2.5% a year however, this reflects past economic trends, rather than current and future economic conditions

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