As Europe's major economies face their worst slowdown since the Second World War, the European Central Bank cut interest rates again yesterday, by 0.5 percentage points to 2 per cent.
This brings the cumulative reduction in rates to 2.25 percentage points since October and means that eurozone interest rates are at their equal-lowest level since the single currency was founded in 1999. However, they remain noticeably higher than the Bank of England's 1.5 per cent and the near-zero levels set in the US and Japan.
Uppermost in the minds of the ECB is the rapidly weakening European economy. Manufacturing output declined by 1.6 per cent in November, it was revealed yesterday, after a similar decline in October. This brings the annual decline in the year to November to 7.7 per cent.
Given that manufacturing accounts for about 20 per cent of eurozone GDP, and that the contraction is expected to become more severe, the omens for growth are poor, though inflation is coming under control again.
Yesterday, the Eurostat agency confirmed early estimates that eurozone consumer price inflation was 1.6 per cent in December, thus falling below the ECB's target of "close to but just below 2 per cent". As in other advanced economies, it is poised to head down sharply, possibly turning negative.
The ECB's cut was in line with market expectations and is testament to the scale of the problems facing the 16-member eurozone, stretching from Portugal to Slovakia. The ECB said that it sees "a further weakening of economic activity around the turn of the year" and "global economic weakness and very sluggish domestic demand persisting in the coming quarters as the impact of the financial tensions on activity continues".
Howard Archer of Global Insight said: "We suspect that eurozone GDP may well have contracted by around 1 per cent in the fourth quarter of 2008. The eurozone is currently headed for GDP contraction of 2 per cent in 2009."
While some of the smaller nations are still growing relatively strongly, concerns focus on the largest members, particularly Germany, the biggest. Already in recession, the downturn there appears to be deepening. The German authorities said on Tuesday that they expect the economy to shrink by between 1.5 per cent and 2 per cent in the last four months of last year.
The strengths of the German economy now appear to be turning against it. Manufacturing is suffering from the slump in demand in Germany's key markets, including the eurozone, the US, China and the UK. Last month, German exports had their sharpest declines since 1969, and industrial orders fell for the twelfth month in a row. Such is the scale of the downturn that Angela Merkel's coalition government has abandoned its previous opposition to "crass" Keynesianism and agreed a €50bn package.
Of the other major economies, France may just escape recession, Italy is already in one, having endured a decade of mediocre growth or worse, and Spain is suffering from the collapse of its property and construction booms.Reuse content