Germany in Trouble

Warning of tough times ahead, the European Commission on Wednesday estimated the three EU heavyweights would see two consecutive quarters of economic contraction over the course of this year.

"The outlook for growth has clearly worsened for the second half of this year," Economic and Monetary Affairs Commissioner Joaquin Almunia said. He blamed high energy and food prices as well as a global financial slowdown for the slump.

The executive arm of the EU also cut the bloc's 2008 growth estimates for a second time in seven months, this time to 1.4 per cent. The Commission had previously forecast a Gross Domestic Product (GDP) growth rate for the 27-member bloc of 2.0 per cent.

The commission's February interim estimate had in turn been revised down by about half a percentage point from its November forecast.

GDP for the 15-member eurozone, which shares the common Euro currency, was similarly revised down, from 1.7 per cent to 1.3 per cent, in line with analysts' expectations.

German institute echoes bleak EU forecast

Echoing the EU's dark forecast, a leading Berlin institute said Wednesday Europe's largest economy is set to contract by 0.1 percent in the current, third quarter.

The forecast, part of the DIW's "barometer" series, is worse than an earlier DIW prediction that there would be nil growth in this quarter in Germany. DIW said it saw a weakening in industrial production and in construction.

For the whole of 2008, the EU Commission forecast that the German economy would expand 1.8 percent, unchanged from its last estimate dating from April.

Europe's economic slowdown is blamed on a combination of factors, most notably a deepening of the global financial turmoil, the international credit crunch due to the collapse of the housing markets and soaring commodity prices.

The commission now expects inflation to average 3.6 per cent in the eurozone this year.

Jean-Claude Trichet, head of the European Central Bank, warned the economic crisis had become a "continual process" and said Europe "needs to be alert."

Germany's top banker remain upbeat

But Josef Ackermann, chief executive of Deutsche Bank, stuck Wednesday to his optimistic prediction that the world financial crisis will be over soon.

His remarks at a conference in Frankfurt contrasted with the more pessimistic Eurozone outlook.

Ackermann, the head of Germany's biggest commercial bank, told a gathering organized by German newspaper Handelsblatt that the end of the downturn was becoming more tangible.

"We see a stabilization. We see the beginning of the end. There is growing confirmation of that," he said.

Ackermann also said he did not expect US investment bank Lehman Brothers to fail despite its huge problems this week.

"A collapse of a bank on this scale would have a whole train of repercussions. But I don't expect it to happen," he said. "I assume solutions will be found if it comes to the worst."

Bad news for Britain and Spain

In a statement accompanying Wednesday's interim forecasts, the EU Commission said plummeting business and consumer confidence, as well as falling industrial production and retail sales in Europe, suggest "a bleak outlook" for the EU economies.

In Britain, which is reeling from a wobbly housing market and turmoil on financial markets, economic activity is expected to contract by 0.2 percent in both the third and fourth quarters.

That would bring growth in Britain, which is not a member of the eurozone, for the whole of 2008 to 1.1 percent, down from an April forecast of 1.7 percent.

The commission also slashed its 2008 growth forecast for Spain to 1.4 percent, down from its April estimate of 2.2 percent.

With a long housing boom turning to bust, Spain would see its economy contract by 0.1 percent in the third quarter and 0.3 percent in the final three months of the year, the Commission said.

Italy too confirmed its reputation as "the sick man of Europe" after its economic growth for 2008 was slashed from 0.5 to just 0.1 per cent.