Italy and the Eurozone Officially in Recession

After Germany, the recession was officially confirmed today in the Eurozone and Italy, while the French economy narrowly avoided the same fate with meager growth. The Eurozone has entered technical recession for the first time since 1993.

Eurostat announced today that the Eurozone economy recorded a decline of 0.2 percent in the third quarter of this year compared to the previous quarter, which also fell by 0.2 percent. Two consecutive quarters of economic decline are defined as a technical recession. On an annual basis, the growth of the Eurozone is only 0.7 percent, half of what it was in the second quarter. Today, Italy joined the “recession” club. The third-largest economy in the Eurozone recorded a decline of 0.5 percent in the third quarter, the highest since the end of 1998. The Dutch economy stagnated in the last two quarters, while Austria slowed its growth to just 0.1 percent in the third quarter.

However, the French economy grew by 0.14 percent in the third quarter, after recording a decline of 0.3 percent in the second quarter. Nevertheless, analysts say that France is expected to face a much worse fourth quarter due to the worsening financial crisis. “Whether we are in recession or not is just a technical question. All indicators and research show that we are undoubtedly on a rather poor trajectory, despite slight economic growth,” says Jean-Louis Mourier, an economist at Aurel Leven.

The German economy has fallen into recession, recording a decline of 0.5 percent in the third quarter, the second consecutive quarter. The British economy is on the brink of recession. In the last quarter, the GDP there fell by 0.5 percent, and it is almost certain that it will also record a decline in the fourth quarter. In Spain, GDP fell by 0.2 percent in the third quarter compared to the previous quarter, marking its first ‘reversal’ in the last 15 years. Despite these poor data, stock prices on European exchanges are holding in positive territory this morning. Because, these data did not surprise anyone.

The MSCI index of global stock markets rose by 1.3 percent this morning, to 223 points, reducing the loss since the beginning of the week to 3.6 percent. However, this year, more than $30 trillion in value has been wiped off global stock markets, while write-offs of bad assets reached $959 billion due to the worst financial crisis to hit the world since the Great Depression. The first European neighbor, Russia, is also struggling. The price of Russian oil has fallen below $50 per barrel for the first time since early 2007, creating strong pressure on the prices of Russian stocks and the ruble.

The ruble has been falling for some time, reaching its lowest level against the dollar in the last 2.5 years, at 27.7 rubles per dollar. Most foreign and Russian banks predict that the Russian government could devalue the ruble by 5 to 20 percent against a basket of international currencies next year if the oil price remains at $50. For now, the Russian central bank is defending the exchange rate as it fears that a sharp decline could undermine citizens’ confidence in the financial system and trigger deposit withdrawals and capital flight from the country.

The Central Bank of Russia reported that foreign exchange reserves have decreased by $9.2 billion since August, to $120 billion, mainly due to large interventions by the central bank to defend the ruble. Economic advisor to the Russian government Arkady Dvorkovich stated that a barrel price of $30 to $35 would create a fundamentally new environment for Russian monetary policy, and that the currency exchange rate would then be depreciated by several percentage points. However, there is no talk of devaluation, he emphasizes. The Kremlin has announced that it will defend the national currency as long as oil does not fall to $35.

“The drop in oil prices below $50 intensifies pressure on the ruble and encourages speculators to bet on further weakening of the Russian currency,” says Chris Waefer, a strategist at the brokerage firm Uralsib. On the global foreign exchange markets, the euro weakened against the dollar and yen today due to the decline in Eurozone GDP. The euro exchange rate fell by 1 percent against the dollar, to $1.2683. Against the yen, it weakened by 1.6 percent, to 122.83 yen. However, the euro strengthened against the British pound and is close to a record level of 86.62 pence. It is currently trading at 85.4 pence. The pound is losing against most international currencies, as investors assess that the recession in Britain will be much sharper than in the Eurozone. Against a basket of currencies, the pound fell by 0.7 percent, to 80.7 index points, reaching its lowest level since 1995. Against the dollar, the pound is hovering around its lowest level in the last 6.5 years, around $1.4555. (H)