Threats on Many Fronts for European Economy

FRANKFURT — Economists may still be debating whether Europe is headed for a sharp slowdown or even a recession, but Steve Knott, who installs home heating systems in Barrow-in-Furness, a port town in northwest England once known for its iron mills, is convinced he already knows the answer.

Mr. Knott, the owner of Furness Heating Components, has cut his work force to 18 people from 25 and said business was tougher than he had ever seen it.

“There’s a lot of competition, and people are just not building that many houses anymore,” said Mr. Knott, 53.

Data released Friday leave little doubt that the European economy is losing momentum before most countries have even recovered to the level of output they had in 2008, when the recession started.

But the larger question is whether an increasingly toxic brew of flagging output plus sovereign debt crisis — along with the downturn in stock markets — will create something more sinister than a mere slowdown, and lead more businesses to cut jobs and investment as Mr. Knott has.

In France, the second-largest economy in the European Union after that of Germany, economic growth came to a standstill in the three months through June, according to official figures. Meanwhile, industrial production in the 17-nation euro area fell 0.7 percent in June compared with May, a greater decline than analysts had forecast.

Economists said they expected a report Tuesday on euro area economic activity to show that gross domestic product growth had slowed to 0.3 percent in the second quarter from 0.8 percent in the first three months of the year.

If there is less economic growth, governments will not collect as much tax revenue as they might have. They will have more trouble paying their debts. That could make investors even more nervous and add to turmoil in the stock and bond markets, which will undercut business and consumer confidence, which will lead to yet slower economic growth, and so on.

“There is a real risk that there is a self-enforcing cycle under way here,” said Martin Lueck, an economist at UBS in Frankfurt.

Mr. Lueck said he believed the most likely scenario is less dire, but even his more optimistic scenario calls for a brief slowdown on the way to a “new normal” of weaker growth in Europe and the United States. And he acknowledged that, in 2008, many economists underestimated how quickly and severely the financial crisis would spill into the broader economy.

“We learned the hard way,” Mr. Lueck said. “The links between the financial world and the world economy are very strong.”

Another recession is already well under way in Greece and Portugal, while economic growth in countries like Britain, Italy and Spain has been very slow since last year. But now Germany, which has been remarkably strong, hauling the rest of the Continent along with it, seems to be decelerating. The Ifo Business Climate index, considered a reliable predictor of the German economy, fell in July as executives became less optimistic about exports.

“It is more than a soft patch,” said Eric Chaney, chief economist at AXA Group, the French insurer. “The business cycle is really coming to a quasi standstill in Europe.”

Worse-than-expected earnings reports from companies like Daimler, Deutsche Bank and Siemens in the last month have reinforced the feeling that the extraordinary German economic boom is near an end. E.on, the largest German utility, said Wednesday that it might need to cut as many as 11,000 jobs after suffering the first quarterly loss since it was created a decade ago from a group of state-owned utilities.

E.on blamed the loss chiefly on the government’s decision to force some of the company’s nuclear power plants to close early, but sales declines in foreign markets like Britain and Hungary also played a role.

Even companies that have done well are warning about risks ahead. “The coming months will be challenging for us,” the chief executive of Volkswagen, Martin Winterkorn, said in late July after the carmaker reported that profit had more than tripled to €4.8 billion, or $6.8 billion.

Article source: http://www.nytimes.com/2011/08/15/business/global/threats-on-many-fronts-for-european-economy.html?partner=rss&emc=rss