MercoPress. South Atlantic News Agency

Euro zone economy contracts 0.2% in second quarter

The Euro zone economy (EU-15) contracted 0.2% in the second quarter compared to the previous three months according to the latest release from the Eurostat statistics office. As a consequence the Euro fell to its lowest in eight months to 1.4386 US dollars.

Lower private spending, because of higher fuel and food prices, and falling exports also had an impact in the expanded Europe, EU 27 which dropped 0.1% from the first quarter of 2008. However compared to the second quarter of 2007, seasonally adjusted GDP rose by 1.4% in the Euro area and by 1.6% in the EU-27, after 2.1% and 2.3% respectively for the previous quarter. A 1.2% quarterly decline in investment knocked 0.3 of a percentage point off the overall second-quarter result for the Euro zone, and a fall in household consumption took away 0.1 of a percentage point. Government spending added 0.1 of a percentage point and inventories were neutral. The contribution from net trade was zero because exports fell 0.4% on the quarter as a result of the strong Euro and slowing export markets; meanwhile, imports declined by the same amount, underlining weakness in domestic demand. The European Commission linked the second-quarter slip to a strong performance by the economy in the previous three months. "In the first quarter, growth was quite high and this was because we had a mild winter and a lot of construction continued - we paid in the second quarter for that," said Amelia Torres, a spokeswoman for the European economic and monetary affairs commissioner, Joaquín Almunia. Other data released Wednesday showed that activity in the Euro zone's service sector, which accounts for almost two-thirds of the regional economy, was below the 50 mark, which divides growth from contraction, for the third consecutive month in August. Falling Euro-zone activity, pulled down by weakness in the three big economies of Germany, France and Italy, plus weaker economic sentiment in July and August, has raised the risk of a technical recession. It is defined by many as two consecutive quarters of economic contraction. Economists expect the slowing economy to gradually reduce inflationary pressures in the Euro zone and eventually allow the European Central Bank to cut interest rates. The ECB is scheduled to meet on Thursday to decide rates and is expected to leave the cost of borrowing unchanged at 4.25%. Economists expect an interest rate cut could be delivered in early 2009.