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European industry slumps, raises rate cut pressure

Factory output all over Europe collapsed in November, presaging a rapid shrinking of the continent's largest economies and raising pressure on central banks to cut interest rates further to stop the rot.

Catastrophic! Disastrous! Horrendous! Analysts on Friday were at a loss for words adequate to describe the scale of the meltdown in European industry as a global credit crunch squeezes the life out of companies all the way from Spain to Sweden.

In Germany, Europe's largest economy and a manufacturing powerhouse, industrial output slumped 10% on the year, its fastest pace of decline since 1993. In France, it fell a record 9%, and in Spain, by 15.1%.

Caught completely off guard by the severity of the downturn, the European Central Bank, which raised interest rates only last July, is expected to chop another half percentage point off its main lending rate to a record low of 2% next week.

“Further out, we believe the ECB will eventually bring interest rates as low as 1.0% in the first half of 2009 as the euro zone suffers sharp recession,” said Howard Archer, chief European economist at consultancy Global Insight.

The Bank of England, which also only started fighting the coming recession in earnest in October, cut rates to a record low of 1.5% this week, and will likely cut again next month.

British factory output dived 7.4% on the year, the biggest drop since 1981 when Britain was in the middle of an industrial meltdown that decimated its car firms and coal mines.

In Sweden, industrial output fell 11.9% annually in November and its central bank looks sure to slash rates further.

But all the rate cuts in the world now will not prevent Europe's major economies from having contracted sharply at the end of last year as thousands of companies go to the wall and hundreds of thousands lose their jobs.

A senior German government source told Reuters on Friday the German economy may have shrunk by as much as 2% in the last three months of 2008.

“The financial crisis has pushed the German industry into a condition of shock and awe,” said Carsten Brzeski, economist at ING Financial Markets. “In terms of economic growth, the fourth quarter of 2008 will make history as the worst quarter ever.”

Things are not much better in Britain or France, Europe's next biggest economies. After the data, analysts said British GDP might have fallen by up to 1.5% between Oct and Dec, putting the country in recession for the first time since 1992.

The French economy, they said, could have shrunk by 1% in the fourth quarter. The automobile industry has so far borne the brunt of the economic storm in France with Renault posting a 4.2% drop in 2008 sales on Friday.

That story is being repeated across Europe as consumers worried about their own jobs and unable to get new loans cut back. Germany's BMW said on Friday its group sales fell by more than 26% on the year in December.

In Britain, Japanese carmaker Nissan Motor Co Ltd said on Thursday it was going to cut 1,200 jobs as sales have slumped upwards of 20% in recent months.

“Looking ahead, the industrial downturn looks set to deepen,” said Jennifer McKeown of consultancy Capital Economics.

Leading economists have forecast the German downturn could lead to a contraction in gross domestic product (GDP) of as much as 4% this year, which would more be than four times worse than the economy's previous postwar nadir.

But with interest rates already approaching zero, central banks are running out of room and may soon have to think about more unconventional steps of boosting the economy.

In the United States, where 524,000 people lost their jobs in December alone, rates have already fallen to between 0% and 0.25% and the Federal Reserve has started buying up assets in its own form of quantitative easing, or boosting the money supply. (Reuters)