European Spending, Exports Decline Most in 14 Years

European consumer spending and exports contracted the most in at least 14 years in the first quarter and investment slumped as the worst global recession in more than six decades prompted companies to cut output and jobs.

Gross domestic product shrank 2.5 percent from the fourth quarter, matching an initial estimate and the most since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said. Household consumption contracted 0.5 percent while exports dropped 8.1 percent and imports fell 7.2 percent, all the most since the series began in 1995. Investment fell 4.2 percent after a 4.3 percent drop in previous quarter that also was the sharpest since 1995.

Even with evidence building that the worst of the economic crisis may be over, euro-area unemployment is at a 10-year high as payrolls start to reflect the severity of the recession with companies from ThyssenKrupp AG to Air France-KLM Group firing workers. European Central Bank President Jean-Claude Trichet, who last month pointed to “tentative signs” of stabilization in the economy, tomorrow will unveil the bank’s latest economic forecasts and details on its next policy steps.

“The declines in exports and investment are mind- bogglingly large,” said Kenneth Wattret, chief euro-region economist at BNP Paribas in London. “The economy is in dire straits so the pressure is still there on the ECB to do more unconventional things.”

Euro-Area Economy

Today’s report showed that from a year earlier, the euro- area economy shrank 4.8 percent in the first quarter, more than double the 1.7 percent contraction in the previous three months. The statistics office had initially put the annual contraction at 4.6 percent for the first quarter.

The running down of inventories contributed 1 percentage point to the GDP contraction in the quarter, the report showed.

“In a way it’s a good sign because it means that inventory unwinding, at least in part, has run its course,” said Daniele Antonucci, European economist at Capital Economics in London.

Amid global concerns about deflation, euro-area producer prices fell 4.6 percent in April from a year earlier, the most since the data were first compiled in 1981, a separate report showed today.

“The massive contraction in industrial activity across the euro zone in recent months has clearly hit manufacturers’ pricing power very hard,” said Howard Archer, chief European economist at IHS Global Insight in London. “The euro-zone outlook still looks far from bright and we suspect that sustainable recovery is unlikely to develop until 2010.”

Credit Losses

The economy will contract “massively” this year and the central bank’s updated forecasts due tomorrow “won’t be very good,” ECB council member Ewald Nowotny said in Vienna last night, Austrian news agency APA reported. Growth next year will be around zero, he said. The EU last month forecast the economy will contract 4 percent this year and 0.1 percent in 2010.

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered more than $1.48 trillion of writedowns and credit losses at financial companies and sent the global economy into its first recession since World War II, according to data compiled by Bloomberg.

The ECB will probably hold its main interest rate at a record low of 1 percent tomorrow, according to economists surveyed by Bloomberg News, as it sets out the mechanisms for buying 60 billion euros ($86 billion) of covered bonds, low-risk securities backed by mortgages and public sector loans. Nowotny said in a letter to Austrian hoteliers last week that the central bank could expand the asset-purchase program beyond that, buying bonds or commercial paper.

Economic Confidence

The global economy will shrink 1.3 percent this year before expanding 1.9 percent in 2010, according to forecasts by the International Monetary Fund. Still, European economic confidence rose for a second month in May and a report today showed the manufacturing and service industries contracted more slowly last month. Investors have also grown more optimistic as the MSCI World Index is trading around seven-month highs.

In the U.K., the euro region’s largest trading partner, consumer confidence rose in May to a six-month high as shoppers became more hopeful that the economy will emerge from the recession, Nationwide Building Society said today.

The euro was lower against the dollar after the GDP report. The European currency traded at $1.4161 at 3 p.m. in London, down 1 percent on the day.