Businesses fear Europe recovery will remain timid

AP News
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Posted: Nov 11, 2009 1:28 PM

From his upstairs office, Jerome Frantz can hear the delivery trucks as they rumble into the yard of the auto parts business his grandfather founded 90 years ago.

In better times, each day Frantz would have as many as 60 big trucks pulling into the forecourt of Frantz Electrolyse just outside Paris, loaded with metal parts to be heat treated and coated in a protective covering.

But demand for auto parts fluctuates with the fortunes of the auto industry including major customers such as Renault SA and PSA Peugeot Citroen SA _ and then with little warning. The summer was weak, but September and October saw a slight pickup, with as many as 35 trucks rolling up each day.

Now Frantz is counting only 25 on a good day.

Business "is starting to crumble again," Frantz told The Associated Press. "When companies are restocking they find it difficult to judge their needs... so we probably had overproduction in September or October. We think things will go back to how they were before" the uptick.

Frantz' outlook sums up the uneasy state of affairs for businesses and workers across the continent. Europe's emergence from the worst downturn since World War II remains fragile and uncertain, marked as much by anxiety as by relief.

Most observers suspect that after five consecutive quarters of shrinking, the economies of the 16 countries that use the euro likely left recession in the third quarter of 2009. Official figures for the will be published on Friday by the European Union statistics agency Eurostat. Britain, which isn't in the eurozone, has already reported it remained stuck in recession with a drop of 0.4 percent in output.

The eurozone's uptick has largely been driven by temporary factors such as restocking by companies who had run down inventories and by massive government stimulus programs such as the cash for clunkers effort to pay people to scrap old cars and buy new ones. Economists fear that growth will weaken as government support programs expire. Sagging prices _ down 0.1 percent annually in October _ show how much slack remains.

Unemployment, now at 9.7 percent in the euro countries, is also likely to put the brakes on growth. Joblessness is a so-called "trailing indicator," because people often lose their jobs only many months after the first slump in demand. Yet rising joblessness will only take money out of people's pockets and blunt demand for cars and other goods.

"The rebound we are seeing now is merely a technical rebound whereby companies have to rebuild their stock and that's quite mechanical," said Laurence Boone, an economist with Barclays Capital in Paris.

"At some stage your washing machine stops working and you have to replace it. That does not mean that consumption is growing fast."

Auto supplier Frantz has cut the company's workforce from around 200 at the end of July, 2008 to around 130. Last winter, the factory, at Villeneuve-la-Garenne near the Paris ring road, shut down entirely for three weeks.

It was the first time since World War II that the business had been closed for so long, except of course for the traditional French vacation closure in August. "The last time we have closed for so long was in June 1940," when former World War I fighter pilot Joseph Frantz closed as the Germans invaded France.

"My grandfather didn't want to help the war efforts of the Germans so he shut down the company for the four years of occupation, starting it up again in September 1944 after the liberation of Paris," said Frantz.

He said he hopes this downturn won't mean another winter shutdown.

The European Commission, the EU's executive body, now predicts the eurozone economy will grow 0.7 percent next year. That's better than a May forecast that it would shrink by 0.1 percent. But it's hardly roaring ahead.

And some countries will do worse than that individually. Spain and Ireland, once the bloc's fastest growing economies, are still mired in recession as they deal with hangovers from problems similar to those in the U.S.: the collapse of real estate bubbles and credit-fueled consumer spending spree. Unemployment in Ireland has doubled in a year to 12.5 percent, and in Spain it reached 17.9 percent in the third quarter.

Italy emerged from recession in the third quarter of this year after five consecutive quarters of contraction, according to Bank of Italy estimates. But companies are planning tough cost-cutting measures to cope with falling sales which are likely to weigh on the country's economic growth going forward.

For instance, Versace's new CEO, Gian Giacomo Ferraris, said the company expects a 30 percent drop in revenue for 2009. The fashion house must move quickly on its restructuring plan, including 350 job cuts worldwide, to stanch losses and return the group to profitability by 2011.

Germany, the EU's largest economy, is spearheading the bloc's exit from recession. The export-fueled economy _ led by automakers such as Volkswagen, Daimler and BMW as well as lesser known firms turning out big-ticket industrial equipment _ returned to modest growth in the second quarter, while preliminary third-quarter figures are expected to show further growth. Industrial orders increased again in September _ rising 0.9 percent on the month _ thanks to strong foreign demand.

France emerged from recession in the second quarter, when it charted 0.3 percent growth. The Bank of France estimates the second largest economy in the euro zone will keep growing, if feebly, forecasting 0.5 percent growth in the fourth quarter.

But industrial production fell 1.6 percent in September, underlining the fragility of the manufacturing-led recovery.

The recession has weighed heavily on the auto industry, which accounts for one in ten French jobs.

While government stimulus efforts have helped stem the decline, Jean-Christophe Quemard, head of purchasing at France's largest auto maker PSA Peugeot Citroen, said the parts industry still has too much capacity and needs a further shakeout.

"We are in a context where volumes are falling or stagnating," he said at a recent breakfast with journalists, "and in Europe we don't see the rebound happening any time soon."