Financial thoughts

The European economy will slow for a third year in 2009 as faster inflation weighs on consumer spending and discourages the European Central Bank from cutting interest rates, the European Commission said.

Economic growth in the euro region will slow to 1.5 percent next year, the commission said today in its spring economic forecast, 0.6 percentage point less than it projected in November and below the 1.7 percent expansion expected for 2008. Inflation will jump to 3.2 percent this year, 0.6 percent more than the commission's February forecast, before easing to 2.2 percent in 2009.

“I'm surprised they felt the need to bring it down so far,'' Jonathan Loynes, chief European economist at Capital Economics Ltd. in London said. “It's very early days, there are an awful lot of uncertainties.''

Record oil prices, declines in the pound and the dollar, and a global credit shortage are buffeting the European economy as the U.S. teeters on the brink of a recession. The fastest inflation since 1992 is preventing the ECB from cutting interest rates to support economic growth.

“These things will have an impact on the economy over a long period of time,'' said Stephane Deo, chief European economist at UBS AG in London. “The growth rate will be not catastrophic, but weak.''

The euro extended its gains against the dollar following the release of the report, rising as much as 0.53 percent. It traded up 0.4 percent at $1.5664 at 1:10 p.m. Brussels time.

`Great Risk'

Thomas Enders, chief executive officer of Airbus SAS, last week said the dollar's decline poses a “great risk'' to Europe's aerospace industry and threatens thousands of jobs.

“There have been at times sharp fluctuations between major floating currencies and we're concerned about their possible implications for economic and financial stability,'' ECB President Jean-Claude Trichet said today.

The commission's forecast for euro-region growth next year is more pessimist than the 1.7 percent median estimate in a Bloomberg News survey of 21 economists. The commission forecast a 1.7 percent expansion this year, compared with the 1.8 percent expansion forecast in February. Economists expect 1.5 percent.

Business confidence in Germany, the world's biggest exporter, dropped to its lowest level in more than two years in April while investor confidence fell to close to a 15-year low no fax payday advance. Germany's growth rate will decline to 1.8 percent this year and 1.5 percent in 2009, the commission forecast today, after 2.5 percent expansion last year.

Public Finances

Slower growth will see public finances deteriorate across the single currency area, the commission said. The aggregate budget deficit for the region will widen to 1.1 percent of gross domestic product after 1 percent this year. The commission previously forecast the deficit narrowing to 0.8 percent.

“We are facing a very challenging time, particularly concerning inflation,'' EU Commissioner for Economic and Monetary Affairs, Joaquin Almunia, said today in Brussels.

Banks and securities firms have so far posted at least $290 billion in asset writedowns and credit losses after the collapse of the market for mortgages aimed at borrowers with poor credit histories. The International Monetary Fund has described the turmoil as the worst “since the Great Depression.''

“The financial turmoil is proving deeper, wider and longer-lasting, while the downturn in the U.S. looks set to be more pronounced and protracted than assumed in the autumn forecast,'' the commission said in today's report. “The balance of risks for the growth outlook continues to be tilted to the downside, especially for 2009, while the risks for inflation are somewhat on the upside.''

Confidence in Germany

Still, consumer confidence in Germany rose against economists' expectations today and inflation slowed across the five German states that have reported April data.

Growth in the French economy will slow to 1.4 percent in 2009 from 1.6 percent this year, while the U.K. economy will expand 1.6 percent after 1.7 percent.

ECB policy makers said that the inflation pressures stemming from the rise in global oil and food prices preclude a cut in borrowing costs after the governing council left its benchmark rate at 4 percent this month.

“We considered that was the best policy to prevent all this inflation imported from outside being passed on and producing second-round effects,'' Bank of Spain governor Miguel Angel Fernandez Ordonez said last week. “If the data changes the policy could shift, but so far I haven't seen any radical change in the data.''

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