http://news.bbc.co.uk/hi/english/business/newsid_1398000/1398666.stm

Link

Wednesday, 20 June, 2001, 16:29 GMT 17:29 UK

European economy on the skids

The latest batch of economic data indicates that the global slowdown is slowly squeezing the profits out of European trade and industry. Most of the data points to sustained downturn as trade deficits in the UK and the continent continue to climb and growth prospects are cut.

The UK Treasury provided one bright point with its decision to keep UK growth forecasts for 2001 unchanged at 2.3%.

However, new data from the Office for National Statistics (ONS) shows that the UK trade deficit has risen to a record high of £7.9bn ($11.06bn) in the February to April period.

The ONS says that the UK has suffered from the effects of a strong pound - which dents profits for exporters and encourages imports - and a slowdown in world trade volumes.

German sloth

Germany, the eurozone's largest economy and engine for the region's growth, is faring worse.

In its June monthly report on Wednesday, the Bundesbank said that German growth "remained very subdued" in the second quarter of the year.

Only the day before the German economy minister Werner Mueller had warned that second-quarter growth "might even be zero".

The European Central Bank also took the opportunity last week to cut its forecasts for eurozone growth to a range of between 2.2% and 2.8% in 2001.

This has left experts, including Bundesbank President Ernst Welteke, convinced that Germany will miss the government's growth target of 2% for 2001.

"This has become relatively unlikely," said Mr Welteke on Wednesday.

Bundesbank member Hans Reckers recently added to fears when he said that a German recession "cannot be excluded".

Stagflation

Meanwhile a slowdown in eurozone industrial production - falling below a long-term average of 2% growth - combined with soaring inflation of 3.4% threatens to plunge Europe into a state of stagflation.

This would leave the European Central Bank with its hands tied because any future interest-rate cuts to stimulate growth in manufacturing could further stoke inflation.

Inflationary pressure, as well as the weak euro, will no doubt be on the minds of ECB officials ahead of the central bank meeting on Thursday.

The slowdown in German growth has prompted widespread calls for a cut in European rates, but many economists are predicting that the bank will keep them unchanged.

Criticism of the ECB

Indeed, the head of the German think-tank HWWA economic research institute, has criticised that ECB for its surprise rate cut on 10 May.

"The ECB should keep their powder dry and not enter the fray unnecessarily," Thomas Straubhaar told the Die Welt newspaper.

The ECB should keep their powder dry and not enter the fray unnecessarily

ECB chief Wim Duisenburg himself said earlier this month that monetary policy had nothing to do with improving the rate of growth in the eurozone.

Instead he blamed rigidities in the labour market.

The euro was stable on Wednesday ahead of the ECB meeting, but it had fallen lower on Tuesday in response to Mr Mueller's comments on German growth.

At 1601 GMT, the euro was changing hands for $0.8506, down from a high of $0.8543.

UK deficit

Minutes from the Bank of England's Monetary Policy Committee suggest UK interest rates will also remain on hold over concerns about rising inflation in the medium term.

The substantial trade deficit, which widened to £2.9bn in April alone, provides evidence of further woes for UK manufacturing.

The sector remains under pressure and in May recorded its sharpest contraction since January 1999, according to a June report by the Chartered Institute of Purchasing and Supply (CIPS).

This was corroborated by a record trade deficit of £2.2bn in April for Britain's goods and services sector.

Also on Wednesday, the European statistics office, Eurostat, released its estimate of 3bn euros ($2.55bn) for the eurozone's global trade deficit in April.

This compares with a surplus of 0.2bn euros in April 2000 and a revised surplus of 3.2bn euros in March 2001.

-- (M@rket.trends), June 20, 2001