European economy to shrink in 2009

There was more evidence on Monday that the European economy continued to deteriorate in the fourth quarter. From Eurostat:

In the construction sector, seasonally adjusted production decreased by 1.1% in the euro area (EA15) and by 1.6% in the EU27 in November 2008, compared with the previous month. In October, production fell by 0.1% in the euro area, but increased by 0.5% in the EU27.
Compared with November 2007, output in November 2008 dropped by 4.7% in the euro area and by 4.2% in the EU27.

The European economy is expected to continue shrinking this year. Bloomberg reports the latest forecast from the European Commission.

The euro-area economy will contract this year for the first time since the currency was introduced a decade ago, the European Commission forecast, cutting its outlook for the region amid the worst financial crisis since World War II.

The economy of the 16 countries sharing the euro will shrink 1.9 percent in 2009, the Brussels-based commission said today, revising a November estimate for growth of 0.1 percent. European Central Bank President Jean-Claude Trichet today said economic prospects are “substantially” worse than the ECB predicted just last month...

In Europe, the slump deepened in the fourth quarter, according to the commission, which estimates that gross domestic product shrank by 1.5 percent in the final three months of the year after a 0.2 percent contraction in the previous two quarters. The economy will continue to contract in the first two quarters of this year, it said...

The euro region will return to growth next year with an expansion of 0.4 percent, today’s forecasts show. This year, Ireland will contract 5 percent, Germany 2.3 percent and economic output in Spain will drop 2 percent. The economy of the 27 countries in the EU will shrink 1.8 percent this year, according to the commission forecasts.

Meanwhile, the UK government has been forced to come to the rescue of banks again. Reuters reports:

The government threw its troubled banks a second multi-billion pound lifeline in three months on Monday and gave its central bank the green light to pump cash into the ailing economy because interest rates are already close to zero.

The latest plan will see the government increase its stake in Royal Bank of Scotland after the bank announced the biggest loss in British corporate history: up to 28 billion pounds in 2008.

But a lack of detail in the package and fears it is one step from full nationalisation sent shares skidding: RBS crashed 70 percent to 10.5 pence, its lowest level for over 25 years, and shares in other banks all slumped heavily.