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Credit crunch clouds uneven European rebound
Posted: 04 October 2009 1436 hrs

Shoppers stroll along Dortmund's pedestrian zone.

PARIS: European economies are shaking off recession but analysts warn the pace of recovery could vary greatly from country to country, revealing a North-South divide, and could be undone by a squeeze on credit.

Economists show near unanimity that official stimulus measures, renewed consumer and business confidence and beefed up production have combined to halt the worst downturn since the 1930s.

The eurozone's two leading economies, Germany and France, have already put recession behind them and, according to analysts at ING Bank "the coming months are likely to bring more good news" for the bloc as a whole.

ING says a return to growth of 0.5 per cent in the 16-nation eurozone is possible in the third quarter compared with the second.

While gross domestic product is projected decline 3.8 per cent in 2009, it should show an expansion of 1.2 per cent in 2010 and 2.1 per cent in 2011.

The rebound in the eurozone is also likely to have a salutary impact on Russia and central and eastern Europe, where analysts at Capital Economics see negative growth of 8.0 per cent this year transformed into a 1.0 per cent momentum gain in 2010 and 2.0 per cent in 2011.

But economists are voicing concern that recovery in Europe will be far from uniform.

"The fast growing economies of the past are likely to be the laggards of the future, while past laggards need to fully tap their growth potential," ING analysts said.

Gilles Moec at Deutsche Bank in a recent note cited a potential North-South split, pointing to "striking divergences" within the eurozone.

Whereas France and Germany encountered the downturn from positions of relative economic health, "the dire state of public finances in Italy prevented any fiscal support from mitigating the recession there while Spain has to cope with over indebtedness in both the household and corporate sectors."

Industrial output, a key component of economic well-being, improved in both France and Germany in July while declining in Spain and Italy, he said.

ING economists say the real test for eurozone will come next year, when government support measures are withdrawn.

"The economy still needs to prove that it can swim without armbands," they wrote recently.

Among their principal worries is the availability of credit - critical to sustaining momentum - in Germany and France.

Loans to the German corporate sector have been on the decline since the start of the year at a time when demand for such credit has been rising, according to ING.

"This makes a real text book credit crunch a realistic threat for the German economy," ING analysts said.

Credit conditions are also tightening in France, where new loans from the banking system to the private sector fell by 20 per cent in July compared with the same month last year and where managers are reporting difficulties in meeting the financing needs of their companies, ING analysts found.

A credit crunch looms over the emerging market economies of eastern Europe as well.

"Aggressive cuts in official interest rates over the past year have yet to have much impact on borrowing costs in the real economy," according to analysts at Capital Economics.

They said that interest rates on consumer loans in every country of eastern Europe are higher than they were a year ago.

The problem, they added, is that emerging market lenders - still saddled with risky, "non-performing" loans - are generally hesitant to approve fresh credit.

For Russia, another potential constraint to recovery is the prospect of falling oil prices next year when a recent surge in stock-building comes to an end, Capital Economics analysts said.

"Any shock to oil prices is likely to lead to a sharp sell-off in the ruble.

"This in turn would force the central bank to hike interest rates and tighten liquidity conditions, thus adding to the already enormous pressure on Russia's fragile banking sector."