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Wednesday, January 11, 2012 11:24 AM

German Economy Contracts in 4th Quarter; Spain's Industrial Output Plunges 7%; UK Trade Deficit Widens; European Banks Wisely Hoard Cash

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There are numerous signs the entire Eurozone is in recession, including Germany. Nonetheless economic dunces talk as if recession can be avoided. For making just that claim, I blasted the IMF on Monday in Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year".

Let's ponder a sampling of data released today that proves without a doubt Europe is already in recession.

German Economy Contracts in $4th Quarter

Bloomberg reports Germany May Be on Brink of Recession

Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate.

The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage point to growth last year, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010, exports increased 13.7 percent.

“All in all, the German economy has remained relatively resilient,” said Annalisa Piazza, an economist at Newedge Group in London. “Signs of moderation have recently emerged but we expect the German economy to remain afloat in the coming quarters, maintaining its role as the major engine of growth for the euro area.”

2012 Forecast

German growth will slow to 0.6 percent this year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19. The European Central Bank, which has cut interest rates to a record low and flooded the banking system with cash during the debt crisis, last month reduced its 2012 growth forecast for the 17-nation euro region to just 0.3 percent.
Preposterous Growth Forecast

The growth forecast for Germany and the Eurozone are both preposterous.

If Europe heads into a prolonged recession (and it has already started), Germany cannot help but get sucked into it. Approximately 28 percent of German GDP is derived by exporting goods to EU countries and Switzerland.

Think German exports to the rest of Europe are going to rise forever? Think again, starting with a look at the Eurozone's 4th largest economy.

Spain's Industrial Output Plunges 7%

Economic Times reports Spain's Industrial Output Plunges 7%.
Spain's industrial output plunged by 7.0 percent in November compared to a year earlier, its biggest drop in more than two years, official data showed on Wednesday.

Economists have warned that Spain may have already entered a recession, with a likely contraction in the last quarter of 2011 and the first quarter of 2012.

The official growth forecast for 2011 stands at 0.8 percent.

The fall in production accelerated in November after a decline of 4.2 percent in October, according to Wednesday's figures.

"All the industrial sectors displayed negative year-on-year rates," the institute said in a statement.

The fall in production was sharpest in the consumer goods sector, at 16.3 percent. Energy fell 5.2 percent.

Industrial production fell 1.4 percent on average from January to November compared to the same period a year earlier, the figures showed.

The November figure was the worst since October 2009 when output fell 9.1 percent during the first wave of the economic crisis.
Spanish Minister Sees Recession Risk

Bloomberg reports Spain Industrial Output Falls, Minister Sees Recession Risk
Spanish industrial production fell the most in two years in November as Budget Minister Cristobal Montoro warned that the euro area’s fourth-largest economy is on the edge of a recession.

Spain’s economy is close to entering a recession, Montoro told lawmakers in Madrid as they began examining Prime Minister Mariano Rajoy’s first package of austerity measures. The plan was announced on Dec. 30 after the new government learned that the 2011 budget gap will be a third larger than forecast.
Interpreting Bureaucratese

Spain has been in recession for two quarters already (assuming it ever got out of recession that started in 2007), yet talk is still Spain "may" fall into recession. Just what the heck does it take for these bureaucratic clowns to admit the obvious?

Actually, if one knows how to interpret  "bureaucratese" they already have. When bureaucrats talk of "risk of recession" it is a sure-fire sign the economy is already in one.

UK Trade Deficit Widens

Please consider Pound Weakens to Three-Month Low Versus Dollar After Trade Deficit Widens
The pound fell to a three-month low versus the dollar after a government report showed the trade deficit widened more than economists forecast, fueling bets the central bank will need to add more stimulus to spur growth.

Sterling declined versus all its 16 major counterparts and gilts advanced after the British Retail Consortium said shop- price inflation slowed in December to the lowest in 16 months. The Bank of England will keep its bond-purchase target unchanged at 275 billion pounds ($422 billion) at a policy meeting tomorrow, according to a Bloomberg News survey.

“The trade data is worse than expected, and it has negative connotation on sterling,” said Jane Foley, a senior currency strategist at Rabobank International in London. “There is also some outside talk about possibility that the Bank of England may expand the target for bond purchases. The consensus view is that it remains unchanged.”
With the Eurozone in deepening contraction, don't expect the UK to export its way out of its economic mess either.

European Banks Wisely Hoard Cash

Please consider Europe Banks Hoarding Cash Resist Draghi
Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, ECB data show. Banks will use most of the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis.

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.
Expect Severe European Recession

Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd. If banks did increase loans, it would add to bank losses. The smart thing for banks to do is exactly what they are doing, parking cash at the ECB.

Austerity measures in Italy, Spain, Portugal, Greece, and France combined with escalating trade wars ensures the recession will be long and nasty.

For additional details please see ...

"Social VAT" Trade Wars Heat Up Between Spain and France

Brussels Recommends Sucking Spain Dry with Increased VAT; France to Raise Sales Tax to Protect Jobs; Is There Any Point or Reason for the Eurozone?

Don't expect the US to be immune from a Eurozone recession and a Chinese slowdown. Unlike 2011, it will not happen again.

Mike "Mish" Shedlock
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