French and German exports fell markedly in May as the eurozone's two biggest economies felt the full force of the global slowdown and faced the prospect of stagnation. Germany's trade surplus narrowed more than expected in May, falling to its lowest level since February 2007 as exports fell 3.2 percent on the month.
In France, Germany's biggest trade partner, the trade deficit hit a record high in May. Together, Germany and France account for close to half the eurozone's economic output and the trade figures added to other evidence pointing to a sharp slowdown in the 15-nation currency area after a solid start to the year.
The bleak trade news, released on Wednesday, came less than a week after the European Central Bank raised interest rates to 4.25 percent - their highest level in nearly seven years - to help get record eurozone inflation back under control.
"Although the ECB has already warned of ... volatility in the data, we doubt that it will raise interest rates further with the economy already stagnating," Jennifer McKeown, European economist at Capital Economics, said in a research note.
French exports fell to 34.719 billion euros ($54.56 billion) in May from 35.313 billion in April. "This looks like the turning point for French industry and it could get worse," said Jean-Christophe Caffet, economist at Natixis.
The European Union's statistics office Eurostat added to worries about the eurozone economy, revising down the first quarter growth figure to 0.7 percent on the quarter from 0.8 percent which it had previously reported.
In Italy the head of the main business lobby, Confindustria, said on Monday that the "frightening" strength of the euro was hurting Italian exports and could throw the country into recession if it appreciates further. "At this moment the euro is so strong it is having a negative impact on our exports," Confindustria's Emma Marcegaglia said.
Italy is the eurozone's third biggest economy. French wine growers have also been complaining about difficulties in selling to the United States due to the weak dollar, which has forced them to raise prices in dollars. The euro has retraced from all-time record highs above $1.60 and was trading at around $1.57 on Wednesday.
The weaker economic environment is taking its toll on some of Europe's top companies. French carmaker Renault downgraded its 2008 sales volume growth target on Wednesday, citing economic uncertainty. "The economic situation has changed dramatically since the end of the year. We now see sales up 5 to 10 percent with a bigger chance for 5 percent," Patrick Blain, executive vice president of sales and marketing, told reporters.
This compared with its previous target of 10 percent. In Germany, industrial conglomerate Siemens AG said on Tuesday it planned to cut around 4 percent of its global workforce. Chief Executive Peter Loescher said Siemens needed to become more efficient to catch up with its competitors. "This takes on special urgency when one considers the economic downturn," he said.
Wednesday's German data showed the trade surplus narrowing to 14.6 billion euros ($22.95 billion) from a revised 17.8 billion in April, and compared with the mid-range forecast in a Reuters poll of economists for 16.5 billion euros. For years, foreign trade has been an engine of German growth, but the global slowdown threatens to stall it.
In France, a 193 million euro deficit for the auto sector is partly due to the weak pound sterling which forced carmakers PSA Peugeot Citroen and Renault to limit sales to Britain to their highest margin models to stay profitable.
Britain's goods trade deficit with the rest of the world held broadly steady in May as both imports and exports picked up slightly, official data showed on Wednesday. Analysts expect the weakness of sterling to help narrow the trade gap eventually.