Euro zone could be buckling under oil and euro pressures

Paris: The euro-region's economy probably contracted in the second quarter for the first time since the single currency was set up almost a decade ago, said economists at Citigroup, JPMorgan Chase and Barclays Capital.

The 15-nation economy is buckling as record oil prices, a stronger euro and a global slowdown take their toll on growth, data showed this week. Exports and industrial output fell in May in Germany and France, while companies including Heidelberger Druckmaschinen and Renault said they're cutting jobs or sales targets.

While Europe may still avoid its first outright recession in 15 years, further pain may be on the way for consumers and executives. European Central Bank President Jean-Claude Trichet is refusing to give up the bank's fight against the worst bout of inflation in a generation and raised interest rates last week just as a housing-market slump worsens in parts of the euro- area.

"The ECB will get its way on inflation, but at the cost of the economy slowing to the brink of recession or worse," said Julian Callow, chief European economist at Barclays Capital in London. He estimates the economy shrank 0.1 per cent in the last quarter and will expand 0.3 per cent in each of the following three-month periods. It expanded 2.7 per cent last year.

The euro-region's economy may display further evidence of cooling next week. Industrial output probably fell 2.3 per cent in May, the most since 1989, according to a survey of economists by Bloomberg News. German investor confidence probably slid to the lowest in almost 16 years, according to another survey.

Renault, France's second-largest carmaker, on July 9 abandoned its sales goal for 2008 and said revenue in the second half "will depend to a large extent on economic and financial developments, still highly uncertain." Heidelberger Druck, the world's largest printing-press maker, said yesterday it plans to eliminate 500 jobs as demand deteriorates and the cost of metals rises.

"We don't have visibility until the end of the year," Heidelberger Druck's CEO Bernhard Schreier said. The euro has gained 15 per cent against the dollar and 18 per cent against the pound in the last year.

The European economy may still avoid recession given growth in the first quarter was boosted by weather, holidays and the end of strikes, said Silvia Pepino, an economist at JPMorgan in London. Still, she now estimates the economy contracted 0.8 per cent last quarter.