Largest European economies indicate slowdown gathering pace

European economic data releases over the summer have consistently pointed to a slowing in the pace of economic growth across the Continent. Recent figures from two of Europe's largest economies - Britain and Germany - indicate that this economic slowdown is gathering pace.

As recently as last spring consensus economic 2001 growth forecasts for Germany were comfortably above 2 per cent. Now most analysts have cut their German growth expectations for this year to 1 per cent, or even lower in some cases. German unemployment has now been rising for seven consecutive months and is expected to average 3.85 million for 2001.

This weaker growth environment puts in jeopardy Germany's commitments under the European Union's stability and growth pact. Market estimates expect Germany's public sector deficit to come close to 2 per cent of GDP this year, which is much higher than the European Union's 1.5 per cent target.

In this environment, Germany's policy makers would love to see a fall in interest rates, but political pressure from Germany has so far cut little ice with the European Central Bank, which takes the view that current euro rates of 4.5 per cent are appropriate for the euro zone as a whole.

In contrast, the Bank of England recently announced a surprise quarter point cut in sterling interest rates in response to recessionary conditions in the manufacturing industry. British manufacturing output declined by 2 per cent over the second quarter, resulting in two successive quarters of declining output.

The British manufacturing sector has been pressured by the strong sterling exchange rate for some years. However, in 2001, the fall off in demand in the key US and continental European markets has been the main culprit creating recessionary conditions in industry.

Despite weakness in manufacturing, the British economy as a whole has continued to perform well, buoyed by strength in the services sector. In this respect, the pattern of economic performance in Britain is much closer to that of the US as opposed to other European economies.

The data in the panel shows the seasonally adjusted annual rate of change from the previous quarter for the main economic categories of the US economy.

Business investment declined by an unprecedented 13.6 per cent during the second quarter from quarter one, and provides proof that the current global slowdown is being driven by a very sharp fall off in capital spending.

In contrast, consumer spending, housing and government spending have remained quite strong.

Quarterly results statements from corporate America indicate that weakness in business investment is likely to persist for some time.

Therefore, consumer spending, which accounts for the lion's share of demand, will need to remain strong if the US is to avoid outright recession.

For the Irish economy, it is becoming increasingly evident that the global economic slowdown is beginning to have a substantial impact on activity. Recent data on industrial output and tax receipts support the view that the economy is now slowing down quite sharply.

The risks that the economy could suffer a hard landing over the next six to nine months have risen considerably. International technology companies have announced very substantial planned job cuts across their global activities in recent months. It is, therefore, highly likely that the pace of redundancies in the important technology sector in the Republic will rise during the second half of this year.

Furthermore, slower growth in Britain and across Europe will put increasing pressure on Irish exporters.

Over the first half of the year the Irish equity market produced strong returns, especially compared with the weakness in overseas markets. In the context of a weakening domestic economy, it is difficult to see a continuation of this relative out-performance during the second half of the year. Therefore, a rise in domestic share prices between now and year-end will be heavily dependent on a recovery in share values in the US and Europe.