EU Says Europe Economy May Resume Growth This Quarter (Update4)

By Simone Meier

Sept. 14 (Bloomberg) -- Europe’s economy probably returned to growth in the current quarter after governments spent billions of euros to pull the region out of the worst recession in more than six decades, the European Union said.

The euro-area economy may expand 0.2 percent in the third quarter and 0.1 percent in the fourth after contracting 0.1 percent in the three months through June, the European Commission, the EU executive in Brussels, said today in updated economic forecasts. For the full year, the economy may shrink 4 percent, the commission said, maintaining its May projection.

European companies from Germany’s ThyssenKrupp AG to France’s L’Oreal SA have reported results that beat analysts’ estimates, suggesting government efforts to encourage spending are feeding into the broader economy. European Central Bank President Jean-Claude Trichet on Sept. 3 cited “increasing signs” of stabilization. EU Monetary Affairs Commissioner Joaquin Almunia said today that the second-half outlook may be revised upward by one-quarter percentage point.

“We expect to see a relatively good third quarter partly as a consequence of fiscal and monetary stimulus,” said Laurent Bilke, a senior economist at Nomura in London. “I wouldn’t call it a recovery, however. The economy will be a bit more resilient in 2010 to face the end of stimulus measures.”

Largest Economy

The economies of Germany and France unexpectedly returned to growth in the second quarter. In Germany, Europe’s largest economy, gross domestic product will probably rise 0.7 percent in the third quarter and 0.1 percent in the fourth, the commission said today. The French economy probably will expand 0.4 percent in the current quarter.

Italy probably emerged from the recession during the third quarter, while Spain’s economy will continue to shrink through 2009, according to the forecasts. The U.K., which isn’t in the euro region, may resume growth this quarter and expand 0.5 percent in the fourth quarter, the EU estimates.

“We know that part of these improvements are due to policy-driven measures and factors,” Almunia told a press conference in Brussels. “We’re not sure that this positive evolution will be sustained during 2010, so we need to be very prudent.”

The ECB earlier this month raised its forecasts for the euro region to predict expansion of about 0.2 percent in 2010 instead of a previously projected 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago. The EU forecasts a 0.1 percent contraction next year.

Cosmetics Maker

Paris-based L’Oreal, the world’s largest cosmetics maker, on Aug. 28 posted a smaller-than-forecast drop in earnings and said sales will gradually improve through the second half. Dusseldorf-based ThyssenKrupp, Germany’s biggest steelmaker, last month said there are signs that prices and sales volumes for some products have bottomed out.

Rising unemployment and the expiration of government stimulus packages may damp economic growth next year. International Monetary Fund Managing Director Dominique Strauss- Kahn said on Sept. 4 that there is a “real danger” policy makers will withdraw support measures for their economies too soon, jeopardizing the global recovery from recession.

In the U.S., the world’s largest economy, the recovery may be the slowest since World War II to regain all the ground lost during the recession, according to JPMorgan Chase & Co. chief economist Bruce Kasman. The Federal Reserve may hold U.S. rates between zero and 0.25 percent through 2010, he said.

Key Rate

The ECB on Sept. 3 kept its key rate at a record low of 1 percent to encourage spending. The Frankfurt-based central bank providing banks with unlimited cash for 12 months and is buying covered bonds to fight the crisis.

“It seems that the period of strong economic contraction is behind us,” ECB council member Yves Mersch wrote in the quarterly bulletin of the Bank of Luxembourg published on Sept. 10. Still, the recovery will “be very gradual and volatile, partly because of the temporary nature of some of its underpinnings, such as government stimulus,” he said.

The financial “crisis, with a lag of two or three quarters, is taking a serious toll on our labor market,” Almunia said. The job market “is still in very bad shape.”

Air France-KLM Group said on Sept. 4 that it will eliminate 1,500 jobs and slash capacity by 5 percent in order to bring down costs. Siemens AG, Europe’s largest engineer, has said that it plans 1,600 job cuts beyond the 17,000 announced last year and has placed 15,000 workers on reduced hours. Euro-area employment declined 0.5 percent in the second quarter, while industrial output fell 0.3 percent in July, data showed today.

European Stocks

European stocks pared their declines after the EU forecasts were published. The Dow Jones Stoxx 600 Index was 1 percent lower at 3:05 p.m. in London, after trading down as much as 1.6 percent earlier.

Companies are cutting costs just as retreating oil prices are pushing down inflation. Euro-area consumer prices have posted annual declines for three straight months. The ECB said on Sept. 10 that, while “inflation rates are projected turn positive again within the coming months,” price developments will remain “subdued” amid “ongoing sluggish demand.”

Euro-area consumer prices probably will drop 0.3 percent this quarter before rising 0.7 percent in the three months through December, the commission forecast today. For the full year, inflation may average 0.4 percent, it said. The ECB aims to keep inflation just below 2 percent.