Europe's Expansion Slowed in Fourth Quarter on Rising Inflation

Europe's Expansion Slowed in Fourth Quarter on Rising Inflation

Feb. 14 (Bloomberg) -- European economic expansion cooled in the fourth quarter as rising inflation crimped consumer spending and the euro's strength made exports less competitive.

Gross domestic product rose 0.4 percent from the third quarter, when it increased 0.8 percent, the European Union's statistics office in Luxembourg said today. From a year earlier, the economy expanded 2.3 percent in the fourth quarter, compared with 2.7 percent growth in the prior three months.

The slowdown in Europe's expansion may intensify this year as the U.S. economy hovers near a recession and households grapple with faster inflation. While the European Central Bank has held off cutting interest rates as food and energy prices soar, it has said economic growth faces ``unusually high'' risks.

``Data not only signal a sharp deceleration but also suggest that the weakness was broad-based,'' said Aurelio Maccario, an economist at Unicredit MIB in Milan. ``Below-trend expansion won't be temporary, and the ECB will need to start an easing cycle in June.''

The fourth-quarter pace of growth exceeded the 0.3 percent median forecast of 31 economists in a Bloomberg News survey.

Growth in Germany, Europe's biggest economy, rose 0.3 percent from the third quarter, when it increased 0.7 percent, according to separate figures today. Expansion in France also eased to 0.3 percent, from 0.8 percent, while Spanish economic growth unexpectedly accelerated.

The euro, which reached a record $1.4949 on Feb. 1, rose 0.3 percent to $1.4614 as of 11:55 a.m. in Brussels.

Europe's Benchmark

Bonds rose as gains in stock markets damped demand. The yield on the 10-year German bund, Europe's benchmark, rose 3 basis points to 3.99 percent. Europe's Dow Jones Stoxx 600 index advanced 0.7 percent, while Germany's DAX and France's CAC also rose.

Borrowing costs for consumers and companies jumped last year as BNP Paribas SA and other European banks ran up losses on investments tied to U.S. mortgages. As the U.S. economy cools the Federal Reserve has slashed interest rates.

While the ECB has yet to follow suit, policy makers have acknowledged there are downside risks to growth. ECB council member Guy Quaden this week said the slowdown in the U.S. economy will be ``more pronounced'' than anticipated, suggesting the ECB may revise its growth forecasts made in December.

ThyssenKrupp AG, Germany's largest steelmaker, said yesterday that profit declined 35 percent in the three months through December on slowing demand in Europe. Elsewhere in Europe, Smurfit Kappa Group Plc, the world's largest maker of cardboard boxes, yesterday forecast a ``modest'' growth in profit this year and said the outlook is ``uncertain.''

Global Growth

The International Monetary Fund on Jan. 29 cut its forecast for global growth this year to 4.1 percent, which would be the weakest pace since 2003. It also lowered its U.S. and euro-area estimates.

The EU statistics office didn't publish a breakdown of fourth-quarter GDP. In Germany, exports and equipment spending helped boost growth in the fourth quarter, today's report said. Consumer spending showed a drop. The statistics office is scheduled to publish a breakdown of fourth-quarter GDP figures on Feb. 26.

In France, consumer-spending growth eased to 0.4 percent in the fourth quarter from the 0.8 percent in the third. Corporate investment rose 1 percent, after 1.1 percent in the third. Exports fell 0.6 percent after having risen 1.3 percent in the third quarter.

BLOOMBERG