French, German Slowdown Signals EU’s Backslide Into Recession

German exports fell and French industrial output stagnated in October, signaling a slowdown that could have the euro region backsliding recession as leaders struggle to solve the sovereign debt crisis.

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German exports dropped 3.6 percent in October, according to the Federal Statistics office in Wiesbaden, while Paris-based statistics office Insee said industrial production was flat in October after falling 2.1 percent the month earlier.

Signs of slowing growth in the euro zone’s two largest economies may tip the 17-nation currency bloc into recession before European governments can boost their rescue fund or successfully tighten fiscal rules.

The current debt crisis has dampened European demand for foreign goods, which has in turn hurt global growth. Chinese manufacturing contracted for the first time since 2009 last month as Europe witnessed multiple regime changes, failed debt auctions, and austerity cuts.

“Fiscal tightening plus credit tightening and the confidence impact of the sovereign crisis point to recession” in Europe, said Sarah Hewin, senior economist at Standard Chartered Bank in London. “We’re not expecting anything as bad as the 2008-2009 downturn on the assumption the euro area will continue to muddle through.”

The European Central Bank slashed its 2012 growth forecast on Thursday to 0.3 percent from 1.3 percent. “These revisions mainly reflect the impact on domestic demand of weaker confidence and worsening financing conditions, stemming from the heightened uncertainty related to the sovereign debt crisis, as well as downward revisions of foreign demand,” said ECB President Mario Draghi. The ECB predicts inflation will slow to 2 percent next year and 1.5 percent in 2013, from 3 percent this year, as growth weakens.

Even German inflation has slowed, declining from 2.9 percent in October to 2.8 percent in November, when the Bundesbank cut its 2012 German growth forecast to between 0.5 and 1 percent, saying a “pronounced” period of weakness can’t be ruled out. Germany’s trade surplus narrowed to 11.6 billion euros in October from 17.3 billion euros in September.

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Meanwhile, French business confidence fell to a two-year low last month, the Bank of France said yesterday, suggesting the economy won’t expand in the fourth quarter.