European Economy: Recession, Q4 2008 GDP Contraction and Sovereign Downgrades

Ponte San Giovanni, 26 Feb 2009. Almost all of Europe is in a recession, with Q4 contractions and soverign downgrades abound. Even France, which initially appeared to be able to emerge unscathed, is now facing a recession.[br]

Ponte San Giovanni, 26 Feb 2009. Almost all of Europe is in a recession, with Q4 contractions and soverign downgrades abound. Even France, which initially appeared to be able to emerge unscathed, is now facing a recession.[br]

In Q4 2008, Europe’s largest economy suffered a record contraction. German GDP experienced a sharp drop in exports was also blamed for a record 2.1% contraction as its GDP reported its worst performance since reunification in 1990.

The Sterling suffered after the biggest yearly GDP drop occured since 1980.

The French economy is expected to shrink by at least a percentage point, according to French government sources on 12 February, 2009. This is following a sharp contraction in momentum in Q4 2008.

GDP will “shrink by at least 1.0 percent in 2009,” reported a source close to Finance Minister Christine Lagarde. “After having been one of the rare European countries where economic activity increased in the third quarter, France at the end of 2008, as did its European neighbors, suffered from the negative effects of the financial crisis that erupted last September,” saidL agarde in a statement.

“It could be minus 1.0 or minus 1.1 or minus 1.2 percent,” the source said. This is in contrast to what the ministry had forecast earlier: a 2009 expansion of between 0.2 and 0.5%.

“After having been one of the rare European countries where economic activity increased in the third quarter, France at the end of 2008, as did its European neighbors, suffered from the negative effects of the financial crisis that erupted last September,” Lagarde said.[br]

Lagarde offerd reassuance, though, by saying these drags on the economy were mostly temporary, and emphasized that household spending had “put up remarkable resistance.”

She elaborated on the effects of the fourth quarter figures, adding that they “do not mean that the situation is going to get worse in the next few months.”

France’s large public sector had largely shielded it from the economic troubles its neighbors have been facing, but this lag could only mean that it recovers last.

Russia’s soverign rating was downgraded in early February by Fitch, and in December by Standard & Poor’s. Many Russian investors were critical of the downgrade, suggesting such agencies had no credibility for such ratings in view of their inability to predict the crisis in the first place.

The Fitch downgrade was to BBB, just two rankings above junk. It was done over concerns of falling oil prices, corporate debt refinancing, and limited foreign exchange reserves.

The last time Fitch made such a downgrade was in 1998 when Russia devalued its currency and missed payments on its domestic debt.

“The scale of capital outflows and the pace of decline in Russia’s foreign exchange reserves have materially weakened the sovereign balance sheet,” said the head of Fitch’s department for emerging markets in Europe, Edward Parker.

France’s Iberian neighbor to the south also posted dismal results with a 2008 Q4 drop of 1.0%, after -0.3% in Q3, meaning Spain has entered a recession. On a yearly basis, GDP shrank by 0.7% in Q4, after -0.3% in Q3.

Latvia perhaps felt the most pain as its economy contracted at an annual rate of 10.5% in Q4 of 2008. This is far more than most economists had predicted. Now the worry is that Latvia may not be able to meet the conditions it agreed to in its recent International Monetary Fund rescue package.

Amid all this bad news, the S&P Sovereign Head expects most AAA countries to withstand the crisis, and does not forsee defaults or a break-up scenario within the Euro Zone.

Francesco Gopalakrishnan, EconomyWatch.com