Germany’s economy is on the brink of recession and will only expand by 0.2% in 2009, the country’s leading economic think tanks have warned.

They said that the country’s export sector could be hit just as hard as the financial sector.

In a twice-yearly report, the institutes added that if the banking sector stabilises, the economy could begin to recover from mid-2009.

A separate survey indicated investor confidence has also deteriorated.

The confidence index, compiled by the ZEW research institute, stood at minus 63 points down from minus 41 points in September.

‘Negative shocks’

The report compiled by four institutes – Ifo in Munich, IfW in Kiel, RWI in Essen and IWH in Halle – stuck to its original forecast of 1.8% growth for 2008, down from 2.5% in 2007.

However, it predicted growth of just 0.2% in 2009 and added that, in a worst-case scenario, the economy could shrink by 0.8%.

“The German economy finds itself in autumn 2008 on the brink of a recession,” the report said.

“A number of negative shocks from outside Germany had already clouded the economic climate. But the dramatic developments on the financial have led to an even sharper deterioration in prospects, ” it added.

On Thursday, German is expected to cut its official growth forecasts.

The report from the institutes praised Chancellor Angela Merkel’s multi-billion euro bank rescue plan, which is part of a joint effort by European countries to stem the financial crisis.

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The world stock markets have rallied at the beginning of the week from a low on Friday 10 October 2008. The FTSE 100 had a low of 3,932 rising to 4,394,but since then has fallen back by 122 points as investors fear that the action from the worlds governments to strengthen the financial system will not prevent a worldwide recession.

Asian governments are the latest to action bank support

Both Europe and US have announced a series of steps to secure their banks to bring back confidence to the banking section by recapitalise banks and by providing bank lending guarantees to get credit markets moving again and the Asian Governments have now followed suit. Worldwide governments have now pledged around $3 trillion as part of efforts to stem the financial crisis facing the world, which is seen as the worst since the 1930′s depression.

Despite the UK running head-long into a recession by December 2008 consumer price inflation has soared to 5.2% in September 2008, which is up from 4.7% in August as the annual rate of inflation for energy and other household bills reached 15%.

The UK’s Retail Prices Index has come in at 5%, which is the figure used to work out pensions and benefits for the coming year.

There are signs however, that inflation is slowing, as oil prices have dropped to around $78 a barrel and food prices are showing signs of reduction and other commodity prices are falling. For example, coffee prices are tumbling due to the credit crunch which is prompting some exporting countries to stockpile the beans in an attempt to push prices higher. Indonesia is the world’s largest coffee producer and on Tuesday they threatened to halt shipments until prices recover and that they were to seek government help to address the crisis.

France’s economy risks shrinking for the second quarter in a row, according to the finance minister Christine Lagarde.

There was a ‘real risk’ of negative growth this autumn, she said. The economy has already contracted by 0.3% in the second quarter of 2008.

If that were to happen, it would meet the usual definition of a recession – two quarters of negative growth.

However the minister deliberately avoided using the word ‘recession’.

In a statement Ms Lagarde said: “The risk of negative growth in autumn for the second consecutive quarter is now real.”

Recession arguments

Her comments came as France’s national statistics bureau, INSEE, said it expected the economy to shrink by 0.1% in the third and fourth quarters of the year.

“We have slowing growth – I will not use any word other than that.” Jean-Claude Trichet ECB president

President Nicolas Sarkozy acknowledged last week the French economy was in recession – but other politicians have shied away from the term.

The head of forecasting at INSEE, Eric Dubois, said it may be premature to use the word recession.

“The term that we are using is growth which is coming to a halt. Saying that there isn’t any growth already seems like a strong enough message to us,” he said.

Significant risks

INSEE’s projections have sparked a debate over the definition of recession.

The head of the European Central Bank, Jean-Claude Trichet, declined to label France and the eurozone’s economic slowdown a recession.

“ECB experts tell us we have slowing growth. I will not use any word other than that – slowing growth with significant risks growth may become even weaker.”

Government officials insist France is not in a true recession because overall growth for 2008 is still expected to be positive – just under 1%.

A European financial summit to discuss the crisis is due to take place in Paris on Saturday.

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This week has seen more turmoil on the financial markets and stress in the banking sector on both sides of the Atlantic!

Whilst the US government is battling to win over Congress to pass the $700 billion bank bail-out the UK Government is nationalising banks on this side of the Atlantic. Just this weekend a deal has been thrashed out with the Bradford & Bingley and the UK Government to secure its future. Whilst over in the US the biggest bank so far, The Washington Mutual to fail and be taken over by regulators as a result of the sub-prime lending fiasco!

With many economies moving closer or into recession, like The Republic of Ireland is now officially in recession and we have Japan now with a trade deficit!

In the UK the economy needs lower interest rates, but this is looking doubtful for HSBC customers where they are looking to raise interest rates due to a shortage of money. However, the World banks are putting yet more money into the banking sector, with the Bank of England lending an extra £30 Billion.

The problems are being reflected in the retail sector with Marks & spencer seeing a turn in their fortunes for the first time in a while and JJB sports has posted a £9.7 million loss for the first six months of the year – “blaming the “worst retail recession” it has ever known”. With the business Ted Baker also in problems and at a point of calling in receivers, the economy is not looking too healthy.

All this is at a time when the present government see it fit to fight amoungst themselves over their leadership, whilst world economies are going into economic meltdown – it is a worry where this is all going to end!

But there is good news for low paid workers! The National minimum wage has been increased by the Government – great for business owers, just what they need when things are tough already – lets add more problems and increased costs.

End of the week saw:
Stock exchanges:
FTSE 100: 5,088
DOW: 11,143
S&P: 1,213
Nikkei: 11,893

Currencies
UK Sterling £ to US Dollar $ 1.83301
UK Sterling £ to Euro € 1.25915
UK Sterling £ to Aus $ 2.20458
US Dollar $ to Euro € 0.68769

The Irish Republic’s economy has fallen into recession after shrinking for a second quarter in succession.

The Central Statistics Office (CSO) said gross domestic product (GDP) had contracted by 0.5% in the three months to the end of June.

The economy had shrunk by 0.3% in the first quarter of the year. Technically, a recession is defined as two or more successive quarters of negative growth.

It is the first time Ireland has experienced a recession since 1983.

The economy is now facing its most difficult period since high unemployment and emigration hit in the early 1980s.

“I think there is going to be a further slowdown in the third quarter of this year, and this will be even bigger than the slowdown we’ve seen so far” Pat McArdle, Chief economist, Ulster Bank

Irish economy – the business view

Economists pointed to the collapse of a decade-long bonanza in Ireland’s property market, coupled with a slump in construction activity.

The global credit crunch has also been a factor behind the rapid economic slowdown.

It means Ireland is the first eurozone economy to slip into recession this year.

House building issues

Earlier this month, the Economic and Social Research Institute predicted the Irish economy would contract by 0.4% over the year after growing by 6% last year.

Dermot O’Leary, chief economist at Goodbody Stockbrokers, said: “We have acceptance now that the economy is in recession in 2008. The issue is whether it will improve in 2009.

“One thing we know for sure is that investment spending is going to continue to act as a drag on the economy in 2009, particularly on the house building side.

“We know also that the labour market is deteriorating – so that is going to affect consumption spending. So it does not look like it is going to be a V-shaped recovery.”

Construction slacking

The Irish data showed consumer spending in volume terms was 1.4% lower compared with the same period of the previous year.

Capital investment was also 18.8% lower in the quarter compared with 2007, with significant declines in house building as well as in the acquisition of transport equipment and machinery.

Industrial output was ahead by 1% on the same quarter in 2007. However, the output of the construction sector fell by 12.2% over the same period.

A government spokesman said: “As expected, lower levels of new house building had a major restraining influence on growth in the second quarter, as is evident from the very weak investment figures.

“Other factors at work include higher commodity prices, global financial market problems, weak demand in our major trading partners and adverse exchange rate movements.”

The country has enjoyed a boom since the late 1990s, with multinationals arriving to take advantage of one of the lowest corporate tax rates in Europe.

Bloxham Stockbrokers chief economist Alan McQuaid said:”Although the domestic side of the economy is contracting at a significant rate, the external side – the multinationals – is holding up quite well, but one would have to question how long that’s going to last.”

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The CBI has become the latest organisation to predict that the UK will fall into recession this year.

The business group estimates that the economy will shrink by 0.2% between July and September, and then by a future 0.1% from October to December.

Its report follows similar warnings from the European Commission and the British Chambers of Commerce.

An economy is generally considered to be in recession after two successive quarters of declining output.

‘Twin impacts’

Although the CBI predicts two quarters of downturn, it adds that it will be a “shallow recession”, and not a return to the prolonged economic woes of the early 1990s.

“The UK may have entered a mild recession that will hopefully prove short lived” CBI director general Richard Lambert

For 2009, the CBI predicts the UK economy will grow at a “feeble” rate of 0.3% – the worst performance since 1992.

CBI director general Richard Lambert blamed the likely recession on the sharp rise in energy and food costs this year, and the downturn in the housing market, both of which had knocked consumer sentiment.

“Over the past year our forecasts for economic growth have been shaved lower and lower as the UK economy continues to struggle with the twin impact of higher energy and commodity prices and the credit crunch,” he said.

“Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived.”

‘Falling inflation’

The CBI added that while inflation – as measured by the government’s preferred consumer price index – should hit a peak of 4.8% this quarter – it expects it to fall back “quite rapidly” over 2009 as energy and other commodity prices decline.

This will give the Bank of England the breathing space to start cutting interest rates, says the CBI, which predicts that rates will fall from the current 5% to 4% by next spring.

“As inflation falls, we should be well placed to move beyond this difficult stage in the business cycle,” added Mr Lambert.

The latest official data from the Office for National Statistics (ONS) showed that the UK economy failed to grow between April and June.

The ONS has also said that UK manufacturing output fell in July for a fifth straight month.

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The US budget deficit is expected to reach a record $438bn in 2009, according to estimates from the Congressional Budget Office (CBO).

It also warns the deficit could go higher as the figure does not take into account possible government costs for taking over Fannie Mae and Freddie Mac.

The CBO added the US government will run a deficit of $407bn this year.

During the next fiscal year – starting on 1 October – a “turbulent” economy would cut revenues, the CBO warned.

‘Increase in spending’

The CBO estimate for 2009 does not include the possible costs of rescuing the two stricken giant mortgage firms, which was announced on Sunday.

Its assessment of $438bn would breach the 2004 record of $413bn and far outstrip the $161bn budget shortfall last year.

“The significant expansion in the deficit is the result of a substantial increase in spending and a halt in revenue growth,” the CBO report said.

In 2008, the CBO estimates, federal spending will be 8.3% higher than it was in 2007; at the same time, total revenues will be less than they were in 2007.

‘Past recessions’

At a news conference, CBO director Peter Orszag said it was too soon to say whether the US officially is in a recession.

But he said that the recent rise in unemployment and economic weakness “are consistent with the pattern seen in past recessions, the past few recessions to be precise”.

He also said CBO’s budget estimates did not take into account possible costs related to the US government for taking over Fannie and Freddie.

But he said the cost of the operation should be directly incorporated into the federal budget, which could further swell deficits.

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The UK, Germany and Spain will fall into recession in 2008, the European Commission has predicted.

Brussels said the three countries would see two negative quarters of economic growth in a row, which is the technical definition of a recession.

In its latest economic forecast, the commission also downgraded its outlook for eurozone growth again.

It said the 15-nation euro bloc would now grow by 1.3% this year, against previous projections of 1.7%.

Earlier this month, data showed the region’s economy shrank by 0.2% between April and June – the bloc’s first decline since its creation in 1999.

The contraction was driven by a slowdown in exports and consumer spending.

But high inflation in the region led policy makers at the European Central Bank to keep interest rates at 4.25% at its latest meeting, allowing no relief for the eurozone’s slowing economies.

In its latest report, the commission believed that inflation was now likely to creep up to 3.6% in the eurozone – above its previous predictions of 3.2% and way above the government’s target of 2%.

Gloomy outlook

Shaken by a housing slump and volatile financial markets, the Brussels-based organisation predicts that the UK economy, which is not a member of the eurozone, will shrink by an annual rate of 0.2% in each of the next two quarters.

A second quarter of negative growth is also expected in the German and Spanish economies, which are expected to contract by 0.2% and 0.1% respectively.

The grim outlook echoes forecasts from the Organisation for Economic Cooperation and Development (OECD) out earlier this week, which were even worse.

According to the latest official figures, the UK economy did not grow at all in the second quarter of 2008.

The European Commission said the UK economy would grow by 1.1% in 2008 – much less than the 1.7% previously forecast and a sharp reduction from the official Treasury forecast of 2.5%.

A Treasury spokesman told the BBC:

“Along with every other country in the world, the UK is facing the twin shocks of high food and fuel prices and the global credit crunch.

“As a result of these global shocks, the UK economy is slowing, as we are seeing around the world. Growth in the second quarter was zero in the UK and it was negative in Germany, France, Italy and Japan.

“But with employment levels near record highs, interest rates that are historically low and the past decade of rising incomes and job creation, the UK is well placed to deal with these challenges.”

Stubborn inflation

Economic and Monetary Affairs Commissioner Joaquin Almunia blamed ructions in the financial markets, soaring commodity prices and the housing slump for the gloomy outlook.

“In a context of an unusually high degree of uncertainty, the external headwinds not only had a direct adverse impact on inflation and capital costs, but also an indirect one on confidence,” he said.

Stamping out hopes of an interest rate cut in the near term, Mr Almunia said even if economic activity were to slow further, inflation risks were still “tilted to the upside”.

“The risk of second-round effects can not be excluded, although there is no evidence of any widespread such effects so far.”

News reported by The BBC

The pound has hit a record low against the euro and a two-year low against the dollar amid fresh fears about the UK sliding into recession.

Gloomy housing and manufacturing data and comments from the Chancellor about the UK’s economic woes are to blame for the pound’s decline, traders said.

Sterling hit 81.21 pence against the euro, before trading at 81.14 pence.

In later trade sterling slipped below $1.80 – the lowest since April 2006 – as lower oil prices helped the dollar.

By the end of European trade, one pound was worth $1.8011.

Sterling has fallen sharply over the past month. In mid-July, one pound bought two dollars.

The catalyst for sterling’s latest fall was downbeat data from the property and manufacturing sectors.

“All indicators seem to suggest that the economy will unavoidably slide into recession”
Lutz Karpowitz, analyst, Commerzbank

Recession fears

UK mortgage approvals fell 71% in July, the the lowest level since records began 15 years ago, according to the Bank of England.

Meanwhile, property consultants Hometrack said house prices fell for an 11th straight month in August.

Elsewhere in the economy, the manufacturing sector shrank for the fourth month in a row in August as demand fell at home and abroad.

“The current weakness of sterling accurately reflects the present situation of the British economy,” said Lutz Karpowitz, an analyst at Commerzbank.

“All indicators seem to suggest that the economy will unavoidably slide into recession.”

Gloomy Chancellor

The data adds to the wave of gloomy news about Britain’s economic health, summed up by the Chancellor at the weekend.

In an interview with the Guardian newspaper on Saturday, Alistair Darling warned that the economic downturn was likely to be deeper and could last longer than first feared.

BBC economic editor Hugh Pym said the global mood had turned against the pound in recent weeks, because of the perceived problems with the UK economy.

The chancellor’s recent comments had served as a reminder of those issues – if anyone needed reminding, our correspondent added.

The former Bank of England policymaker Professor Charles Goodhart warned that the UK’s economic recovery may not begin until 2010.

Analysts said that sterling’s fall was fuelled by pessimistic prospects at home and a downturn in the eurozone economy that could also hurt UK growth.

“It’s now just a question of which is the straw that breaks sterling’s back,” said Martin McMahon, currency strategist at Credit Suisse.

Another measure of sterling’s performance – the trade-weighted sterling average – also fell to the weakest level since October 1996.

The trade-weighted sterling average tracks the currency against the UK’s main trading partners.

News reported by The BBC

The pound has fallen to two-and-half-year low against the US dollar and record low against the euro amid fears about the health of the UK economy.

Sterling fell as low as $1.7850, and was trading at 81.62 pence per euro.

Measured against a basket of currencies used by major trading partners, the pound is now at a 12-year low.

Sterling has fallen sharply over the past month – in mid-July one pound bought two dollars – as fears increased the UK was heading for a recession.

At the same time, the dollar has been helped by a fall in the price oil.

Difficult outlook

The US currency has been gaining ground in recent weeks and on Tuesday the euro fell to a seven-month low versus the dollar, dipping below $1.45.

Falling oil prices, which hit a five-month low on Tuesday, have been a factor behind the dollar’s rally.

Investors had bought commodities to protect against the dollar’s weakness earlier this year but are now unwinding those positions – to the US currency’s benefit.

Analysts also said the dollar was strengthening because the US economic outlook appeared better than the deteriorating picture in the UK and the eurozone economies.

“It is difficult to see an improvement in sentiment in the UK in the very near term,” said analysts at Barclays Capital.

Gloomy comments over the weekend from UK Chancellor Alistair Darling, who warned that Britain was facing its toughest economic challenge for 60 years, triggered sterling’s plunge on Monday.

Weak mortgage approval data added to the dark mood.

News reported by The BBC