Saturday, February 14, 2009

Europe wakes up to the recession

Dinner in Rome on Monday night with the management of an Italian manufacturing company that held the opinion that the recession was caused by anglo-saxon bankers and wouldn't really impact them.Fridays figures showing a 1.8% decline in Italy's fourth quarter GDP was presumably an aberration.

There has been and still is a widespread view in Europe that the downturn would hit the UK and Ireland but would leave the continental economies relatively unscathed. That outlook is only now beginning to change and be replaced by a growing sense of despair. This is warranted .The current downturn will be deeper than previous recessions and modern information technology will force it through the system very quickly. By 2010 things should have stabilized , but some 10% of installed capacity will be wiped out.

The UK has been in the doldrums for some time - it looks to me as if the contraction will continue there until the tail end of this year before stabilizing. In Europe there will be a rapid forced reduction in manufacturing capacity as credit dries up- steel, shipping and electronics are already feeling the pain and consolidation, closures and steep write downs in goodwill,inventory and plant and equipment will hit the reported numbers over the next three quarters.

Governments are throwing money at the car sector - in the short term this helps maintain employment but the distortions created by this failure to deal with excess capacity will stay with us in the form of subsidies for years to come.

Savings rates are rising across the EU. The consumer is increasingly frightened. In this environment industries dependent on discretionary spending or status are to be avoided. A return to the growth levels seen in the '80's and '90's is impossible against a backdrop of government regulation of the banking industry with higher credit and reserve requirements . Welcome to an EU where 1% annualised growth will become the norm.

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