Sat, Jul 05, 2008 page9

• Confidence dips as Europe catches US’cold

  Much of Europe thought it had escaped
  the worst of the credit crunch, but the effects
  are only beginning to be felt

  • By Alasdair Sandford,Kate Connolly,Tom Kington ,Graham Keeley / THE GUARDIAN
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  The French pride themselves on having been spared the excesses seen in the US and elsewhere in the subprime crisis.

  “In France there is no credit crunch,” BNP Paribas CEO Baudouin Prot said recently, using its English name as if to emphasize its Anglo-Saxon origin.

  He praised the responsible behavior of French banks within a tightly regulated system but acknowledged there had been an impact owing to the rise in the cost of borrowing, slower growth and a fall in demand among borrowers.

  

  ILLUSTRATION: MOUNTAIN PEOPLE

  The housing market has been hit hard. Sales of new properties have fallen by 28 percent, government figures show. France Info, a national radio station, recently devoted a day to the property crisis, featuring estate agencies forced to close because of the collapse in business.

  The Institut National de la Statistique et des Etudes Economiques (Insee) said this month that tight credit had contributed to a plunge in new construction work, which in turn had begun to undermine growth. However, unemployment is 7.2 percent — the lowest for 25 years — and a further drop to 7.1 percent is forecast by the end of the year.

  Le pouvoir d’achat — spending power, or rather the lack of it — has long been a French preoccupation. French President Sarkozy’s failure to make headway, having vowed to do so, is one reason why his popularity has fallen. Insee’s latest survey of household confidence suggests that it is at its lowest level since records began 20 years ago.

  The government has fought back with an ad campaign on TV and the Internet that heralds measures it claims are putting more money in people’s pockets. Happy French families are shown building houses and shopping thanks to tax breaks. “Month after month, we’ll win the battle of purchasing power” is the slogan. Insee may have something to say about that.

  GERMANY

  While its economy is in a fairly robust state thanks to strong demand for its exports and a solid manufacturing sector, inflationary pressures are eating away at consumer confidence in Germany as much as anywhere else in Europe.

  Confidence has fallen to a three-year low, the GfK institute found, leading analysts to conclude that Germans — always prudent consumers at the best of times — are tightening their belts in preparation for harder times to come. Inflation, which was about 3 percent in May, is expected to hit 3.3 percent this month — the fastest rise for about 12 years.

  “Germans are avoiding big purchases,” the GfK said, halving its forecast for consumer spending growth this year to 0.5 percent.

  Germans’ reluctance to spend boil down to gasoline and diesel prices, which have doubled over the past year, and increases in food costs and energy bills, along with fears of further inflation, the crisis in the financial markets, a strong euro and the general worldwide downward trend.

  The dark mood has been compounded by news that Germany’s Ifo business index has also hit a two-and-a-half year low this month.

  “Germans are viewing this all very pessimistically,” the GfK said. “Repeated announcements of new record petrol and diesel prices have compounded consumer fears of a loss of purchasing power.”

  Even though the economy remains strong, Germans fear that it will not stay that way amid widespread worries that the US slowdown and the weak dollar will certainly have repercussions. A strong euro is not seen as a good opportunity to go on a cheap shopping spree to New York, rather as a cause for much worry about exports.

  Being one of the most credit-wary nations in Europe (many Germans do not own a credit card and it has one of the lowest rates of house ownership on the continent), even Germans who are not yet affected by rising prices would rather put money aside for a rainy day.

  Elsewhere in central and eastern Europe, where most countries have enjoyed exponential growth in recent years, it is the property markets that are taking the most substantial hits.

  House prices have fallen by 10 percent in Estonia and by 20 percent in Latvia this year. Poland, Hungary and Lithuania have not escaped the drift downward, though falls have been less dramatic.

  But Poland is bucking the trend. It is enjoying healthy growth, a strong zloty and rising wages, and is hampered only by a huge labor shortage. Put in the context of the British downturn, it has suddenly become very attractive for many Polish migrants — whose infusion of cash has already boosted growth and consumer spending — to return home.

  ITALY

  Italian banks were always parsimonious about handing out loans and Italians traditionally dislike credit.

  This means Italy could escape the worst effects of the credit crunch, said Pierpaolo Benigno, an economics professor at Rome’s Luiss University.

  “Lending to companies, which has been well monitored, remains consistent and although private mortgages have dipped, that’s due to rising interest rates. There is no fallout from the credit crunch here,” he said.

  Consumer lending is now on the rise, but Italy has some catching up to do, Benigno said.

  “Banks are traditionally more familiar with the people they lend to and are more vigilant, and there remains a cultural bias against credit,” he said.

  But crunch or no crunch, Italians are suffering from soaring food and fuel prices, with consumer spending dropping 2.3 percent year on year in April. Shoe purchases were down 6.4 percent , while supermarkets report Italians are abandoning the Mediterranean diet they made famous for cheaper frozen foods.

  The daily newspaper Corriere della Sera summed it up last week as: “The Italian paradox — fewer debts, greater pessimism.”

  Italians, it said, now face the “Syndrome of the fourth week” as fridges are emptied before payday.

  The employers’ group Confindustria believes economic growth will hover at about 0.1 percent this year — well below the 0.5 percent predicted by the government — and Italian business confidence fell to a three-year low last month as the country’s PARIS, BERLIN, ROME, DUBLIN and BARCELONA, Spainlegions of small manufacturers fear for the prospects of domestic and foreign sales.

  Car crashes are reportedly decreasing in the capital at the end of each month as car-mad Romans run out of money to buy gasoline, while managers at one low-cost supermarket run by a charity in Rome’s suburbs were surprised to see far more Italian than immigrant families showing up for cut-price food.

  House prices did rise by about 1.6 percent in the first six months of the year, the economics institute Nomisma said, but house sales are set to fall this year by 5 percent to 6 percent compared with last year.

  “There is a stability in house prices right now because both supply and demand have fallen but demand is now set to fall faster, with prices in the suburbs the first to fall,” Benigno said.

  SPAIN

  After years of easy living, when growth in Spain outstripped its European neighbors, things are getting a lot tougher. But Spanish Prime Minister Jose Luis Rodriguez Zapatero, who has been loth to describe the country’s economic slowdown as a crisis, said this week that GDP would rise by only 2 percent next year.

  In a bid to balance the budget, public sector recruitment will be cut by 30 percent and top officials’ salaries will be frozen. The government was also forced to admit that unemployment forecasts for next year would be closer to 11 percent than the 10 percent previously expected.

  The state surplus has dropped 80 percent to 2.77 billion euros (US$4.35 billion) for the first five months of the year, against almost 13.6 billion euros in state coffers for the same period last year. This has forced the government to tighten its belt after the downturn in construction led to a sharp fall in tax revenue. House sales dropped 32 percent in the first quarter and construction output fell 8 percent last year, said Eurostat, the EU statistics body, compared with a fall of 2.9 percent in the UK.

  Up to March, the value of mortgages issued was some 17 billion euros, against 41.2 billion euros a year before. And the number of borrowers defaulting on home loans shot up to 1.3 percent in April — an eight-year high after 10 consecutive months of rises.

  Banks and savings banks are in a cutthroat battle to steal each other’s clients. Clients at banks with good credit histories are being targeted with low-interest rate mortgages by rivals to get them to jump ship.

  There is also grim news from the high street. Inflation is above the eurozone average: Prices rose at a annual rate of 4.6 percent in May — a 13-year-high. As the summer sales start, shops are cutting prices by 50 percent or more to entice shoppers. A Barcelona glass shop was offering ornaments at up to 60 percent off.

  With sales falling, the buzzword in Spain is cost-cutting. At Audi Espana, cars and mobile phones are being taken from mothers on maternity leave as the car firm becomes “mad to save money,” a source at the company said.

  Across the border in Portugal, things are little better. After sharp growth in the late 1990s, unemployment fell to 3.8 percent . But now the current account deficit is 8 percent of GDP and unemployment reached 7.6 percent in the first quarter. GDP fell in two of the past three quarters.

  IRELAND

  Even France’s august ambassadorial residence in Dublin has become a casualty of the economic downturn.

  The French government had put the house, set in a half-hectare garden on south Dublin’s smart Ailesbury Road, on the market in January for about 60 million euros. Yet in six months the price of the house has dropped dramatically by 10 million euros — just one example of the collapse in confidence in the property market.

  The Irish economy is on the verge of its first recession since the hard times of the late 1980s, when the republic suffered mass unemployment and emigration. The once burgeoning building industry, which turned Dublin’s real estate into one of the most expensive on the planet, has almost ground to a halt.

  Employment in the sector is reported to be down by 14 percent in April. Housing completions have dipped from 93,000 in 2006 to less than 35,000 this year, while Irish estate agents have asked its staff to accept 10 percent pay cuts.

  The drop in the number of houses built is estimated to provide 1 billion euros less in taxes for the Irish exchequer, which in turn may have an impact on huge state road, rail and infrastructure projects under the National Development Plan.

  The Economic and Social Research Institute, a respected Dublin think tank, says the economy could shrink by 0.4 percent — unthinkable in the double-digit growth years of the Celtic Tiger. The institute also predicted this week that Irish consumer spending, after the shopping spree decade of excess, would fall by 2.6 percent. It even resurrected the spectre of emigration — predicting 20,000 people would leave next year, something not seen for 18 years.

  The unemployment rate is also expected to increase next year to about 7.1 percent of the work force, it warned.

  Nor has Brian Cowen’s embattled government, which is still reeling from defeat in the Lisbon Treaty referendum a fortnight ago, much scope to spend its way out of a recession. Falling tax revenues will leave a 7.4 billion-euro hole in public finances, the institute said.
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