Euro Jitters

All this while, with the focus on recession in the US, Euro area troubles had not received much attention. However, Euro problems seem to have made a big bang appearance with Germany announcing an up to 6% negative growth in its GDP this year on the back of a 3.8% negative real GDP growth in the first quarter of this year. The 16 nation Euro economy itself contracted 2.5% in the first quarter as compared to the last quarter of 2008. The Euro zone is Germany’s largest export market and a contraction in the Euro zone seems to have triggered a German slowdown.

Leading the slowdown, industrial orders in the Euro zone dropped 26.9% on a year on year basis, with March orders falling 0.8%. Led by a slowing demand, German exports fell 9.7% in the first quarter of this year and company investment slowed by 7.9%. Orders of Airbus slumped 97% in the first quarter of this year and BMW’s sales fell 23% in April 2009, compared to the same period in the previous year. The steep fall in demand is forcing companies to slash output and jobs. BMW proposes to cut labor costs by 250 million Euros on the back of falling demand. The rapid decline in the European economy is the fastest in the last 13 years and the 3.8% drop in the German GDP is the steepest since 1970. Not only have German exports suffered, but as a part of the negative spiral, German imports contracted by 5.4% in the first quarter of 2009 as compared to the last quarter of 2008. It may be noted that the German economy grew by 1.8% in 2008, though only half the pace achieved in 2007.

However, a closer look at the data suggests that the recession may be bottoming out in the Euro zone as the March fall in industrial orders is limited to 0.8% compared to a 26.9% annual drop, which translates to over 2% a month. This suggests that the pace of decline may be slowing and the recession may be at its inflexion point. Another indicator supporting this is a 0.5% rise in consumer spending in the first quarter of this year. Consumer surveys also suggest that German consumer sentiment is steady. The GfK research group put its German consumer climate index at 2.5 points for June, unchanged for the levels for April and May. Another index also suggested that German companies were more confident about the economic scenario than they were in the last six months. The Ifo index that gauges business confidence of 7000 companies, was up at 84.2 in May from 83.7 in April, suggesting that the worst may be over.

The announcement of a marked slowdown in the German GDP as well reports that toxic assets held by German banks could blow up, led the Euro to pare its value against both the dollar and the yen. As per estimates of the German regulator, toxic assets held by the nation’s bank are to the tune of 200 billion Euros. The decline in the Euro was also triggered by Japanese investors turning their focus from the US economy to the Euro economy and booking some profits on their Euro holdings.