Page last updated at 11:21 GMT, Thursday, 14 August 2008 12:21 UK

Europe's major economies contract

One German company on being hit by the slowdown

The 15 economies of the eurozone contracted by 0.2% between April and June, heightening fears that the euro area is sliding towards recession.

The eurozone's first decline since it was created in 1999 was driven by a slowdown in exports and consumer spending.

The German economy, Europe's largest, shrank by 0.5% in the second quarter compared with the previous quarter.

And in both France and Italy GDP shrank by 0.3% in the second quarter.

The slowdown was less pronounced in the wider European community of 27 nations including the UK, which contracted by 0.1%.

The possibility that the European Central Bank is cutting interest rates in 2008 to support the sickening economy is remote
Economist Jörg Radeke

However Estonia, where the economy contracted for the second consecutive quarter, is now considered to be in recession.

Ireland, whose economy contracted in the first quarter of the year, has not yet released its second quarter growth figures.

Compared to the second quarter of 2007, the eurozone economies grew by 1.5% and the 27 European Union countries grew by 1.7%.

The news weakened the euro, which was already well down from its recent highs against the dollar.

But high eurozone inflation, which was unchanged on the month, made it unlikely that the European Central Bank, which raised interest rates last month, will reverse its stance.


GDP graph

The figures reflect the way in which exporters have been affected by the strength of the euro, which makes their products more expensive overseas, and a more general slowdown in global demand.

French finance minister Christine Lagarde, said the decline in the French economy in the second quarter "mostly reflects the deterioration of our international context, which particularly weighed on our exports and which is common to all European countries".

"The fundamentals of the French economy are healthy," she added.

Meanwhile a German finance minister said its economy could contract again in the next quarter which would mean Germany was officially in recession.

"At the moment that cannot be ruled out," said deputy economy minister Walther Otremba.

'Orders down'

Germany was once seen as the main driver of growth in the eurozone.

In simple terms it will lead to more unemployment - as order books fail to fill up
John Ford, Exeter

However exporting companies, such as Berlin-based manufacturer Witels Albert, are cutting back after seeing orders decline in the last few months, especially from the US.

"There is a slowdown in the industry and one of the main reason is the rise in oil price," chief executive Horst Schneidersreit, told BBC News.

"We have seen this in our own company. Our orders have slowed down."

Despite the sharp slowdown in the second quarter in Germany, the government said it still expected GDP growth of 1.7% this year.

Spain was the only one of the major eurozone economies to see its economy expand between April and June. It grew by 0.1% compared with the previous quarter.

Inflation steady

Figures also released on Thursday showed that prices across the euro area rose by 4% in July compared to a year earlier.

The European Central Bank increased interest rates in July by 025% to 4.25% in a bid to combat rising prices.

The July figure is the same as June's inflation rate, but although the rate of increase is not quickening, economists said rising prices were still a concern.

"Although inflation has been stable at 4.0 % in July, it is still way above target," said Jörg Radeke from the Centre for Economics and Business Research.

"Hence, the possibility that the European Central Bank is cutting interest rates in 2008 to support the sickening economy is remote."

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