Friday, February 13, 2009

Europe GDP Drops

From the WSJ:

German economic growth posted its sharpest quarterly fall since 1987, as machinery investment and exports nose-dived, data from its Federal Statistics Office showed Friday. Real GDP declined 2.1% from the third quarter, when adjusted for seasonal and calendar effects, well below economists' forecasts of a 1.8% quarterly fall.

This was the third quarter in a row that German GDP declined, after falling by 0.5% in the second and third quarters of 2008 respectively from the quarter-earlier periods. The loss also marked the sharpest quarterly drop in GDP since the first quarter of 1987, when GDP declined by 2.5%.

Germany, the euro zone's largest economy, is widely expected to contract 2%-3% this year, which would mark the steepest decline since World War II.

France's finance ministry, meanwhile, said late Thursday that GDP in the euro zone's second-biggest economy contracted 1.2% in the fourth quarter -- also more than the 1.0% decline expected by market participants. It said GDP should contract by at least 1.0% this year on average. In a radio interview earlier Friday, French Finance Minister Christine Lagarde said the country was, "clearly in a recession."

In Italy, GDP shrank 1.8% on a quarter-to-quarter basis between October and the end of December, the sharpest decline since 1980, after contracting 0.6% in the third quarter.

Eurostat said the EU economy as a whole slipped into recession in the final quarter of last year. EU GDP shrank 1.5% on a quarter-to-quarter basis after declining 0.2% in the previous three-month period.

There are several reasons why this is an important and scary development.

1.) For some time there was a theory that the US economy would decouple from the rest of the world. In other words, the US would have a recession but Asia and Europe would not be effected. This theory is obviously wrong and is now formally dead in the water.

2.) Exports of US goods were a bright spot in US GDP reports for some time. That is no longer the case.

3.) The recession is now global -- it's hitting everybody hard. That means we've got some really big problems to deal with.

4.) Asia which exports to everybody has to deal with another export market in decline. That means Asia is also negatively effected by this.