European investment, spending decrease as economy contracts

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Sep 3: European consumer spending, company investment and exports declined in the second quarter, dragging the economy into a 0.2 % contraction and pushing it to the brink of a recession. Investment by companies fell 1.2 %, the first decline in five years, and household spending dropped 0.2 % after stagnating in the previous three months, the European Union statistics office in Luxembourg said on Wednesday. The 0.2 % decline in overall gross domestic product matched an initial estimate published on Aug. 14.

The economic slump has yet to prompt the European Central Bank to drop its inflation-fighting stance even as data show the slowdown extended into the current quarter. Separate figures today showed retail sales unexpectedly fell 0.4 % in July. ECB policy makers will probably keep interest rates at a seven- year high tomorrow as they seek to prevent a wage-price spiral.

"The ECB did the minimum last month and it would make sense for them to acknowledge the downturn a bit more this week,'' said Laurent Bilke, an economist at Lehman Brothers in London, who expects the economy to shrink again in this quarter. "But I think they can claim they need a bit more insurance that the price of oil will drop more for them to say inflationary pressures have eased.'' The overall contraction in the economy is the first since the introduction of the euro almost a decade ago.

The decline in company investment followed a 1.5 % surge in the first quarter, when mild weather prompted the construction industry to bring forward building projects.

The decline in retail sales followed a 0.9 % drop in June. Economists had forecast at 0.1 % increase, based on the median of 25 estimates in a Bloomberg News survey.

The euro extended its decline after the reports and was down 0.8 % to $1.4398 at 10:50 a.m. in London.

Government spending rose 0.5% in the three months through June after a 0.3 % gain in the previous quarter, according to today's report. Exports fell 0.4 %. From a year earlier, the economy expanded 1.4 %, less than the 1.5 % initial estimate. Bertelsmann AG, Europe's largest media company, on Aug. 28 cut its 2008 profit forecast after advertisers slashed marketing budgets to reduce costs amid the slowdown. L'Oreal SA, the world's largest cosmetics maker, a day later reported the slowest profit growth in three years.