Economies slow in Europe as inflation catches up

Posted: Tuesday, July 22, 2008


While each country has written its own recipe for what appears to be a looming slowdown, they all have one key ingredient in common: "Inflation, inflation, inflation," said economist Gilles Moec of the Bank of America in London.

Pinched by higher prices, consumers aren't spending - and polls find confidence levels are falling in most of Europe's big economies.

The dynamics of slowdown vary greatly from country to country, creating a complex scenario that is exacerbating worries about how bad it will get - and making it harder for the European Central Bank to conduct its one-size-fits-all interest rate policy. Stressing the need to fight inflation, the bank raised rates earlier this month, despite fears that might weigh on growth.

Spain, Ireland and Britain suffer from burst housing bubbles, like the one in the United States. Germany's export motor, running strongly for several years, is suddenly sputtering.

Denmark is already in a technical recession - two consecutive quarters of decreasing economic output. According to many economists, the list of suspects for second-quarter contraction is growing: Spain, Italy and Ireland and possibly France and even Germany.

"Overall, inflation is at 4 percent, twice the target of the European Central Bank," said Marco Annunziata, chief economist of UniCredit Markets and Investment Banking in London.

"If you look at core inflation - if you ignore the prices of food and energy - it is less than 2 percent. That shows the prices of everything else except food and energy are quite stable. The question is: How long can it last?"