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Europe and UK seen plunging into recession

  Europe’s economy appears to be plunging into recession, beaten down by a still-raging global financial crisis, with data on Friday showing economic contraction across the euro area and Britain.


Reports showed the euro zone’s private sector economy shrinking this month at the fastest pace since monetary union, and a much deeper than expected contraction in Britain’s economy in the third quarter, leading many analysts to declare “recession.”

Analysts who were already convinced that aggressive interest rate cuts were coming soon from both the European Central Bank and Bank of England at their November meetings were emboldened by the speed and severity of the downturn in the data. The euro and the pound tumbled to multi-year lows against a resurgent dollar after the reports were released. Major stock markets nosedived, falling as much as 11%. “The euro area has entered a deep recessionary spiral,” said Aurelio Maccario, chief euro zone economist at UniCredit.

Overall private sector activity is shrinking at its fastest pace in at least a decade in the euro zone, led by a severe contraction in manufacturing, according to the October Markit Eurozone Flash Purchasing Managers’ Indexes. Services business contracted at its fastest pace since the Sept 11, 2001 attacks on the United States. Apart from a collapse in the surveys’ input and prices charged gauges that may help put an end to lingering inflation concerns, there was virtually no positive news in the reports, which also saw record one-month declines in many key measures of activity. “It looks like it is a serious recession,” said Gilles Moec, economist at Bank of America.

Across the Channel, official data showed Britain’s economy shrank 0.5% in the three months to September, more than forecast and the first fall in 16 years, stoking fears not just of recession but of a painful and prolonged one. “It’s a very emphatic entry into recession which underlines the need for dramatic rate cuts -- which we think the Bank of England will deliver,” said Brian Hilliard at Societe Generale.

A Reuters poll taken earlier this week showed a majority already expected a half point cut from the Bank in two weeks to 4.0% and a series of cuts early next year, arriving at 3.0% by the June meeting. Bank Monetary Policy Committee Member Andrew Sentance, who only months ago had been voting for higher interest rates, echoed analysts’ concerns, saying the risks of a severe recession have increased.

A separate report showed sentiment among Italian businesses plunged to levels last seen in 1993, when the economy seized up after Italy was ejected from Europe’s Exchange Rate Mechanism. Taken together with plunging inflation rates reported by services and manufacturing companies across the euro zone, analysts are convinced that the ECB is set to slash interest rates aggressively from their current 3.75%. “Growth looks likely to be stagnant at best in the latter part of the year,” said Ben May, economist at Capital Economics. “In all, another gloomy survey which supports our view that the ECB will continue to cut rates aggressively.” (Reuters)