Europe to Stay in Recession 2 Years: Strategist

The European economy will remain in recession for at least two years as companies slam the brakes on capital spending because of the financial crisis, Charles Cara, European equity strategist from Absolute Strategy Research, said.

"The credit crunch will severely limit the ability of companies to finance capital spending plans," Cara wrote in a research note.

Capex, which includes expenditures such as buying new equipment or upgrading existing machinery or acquiring industrial buildings, reached 22 percent of gross domestic product by the end of 2007, making it a highly significant factor for the overall economy and key to any potential recovery.

Capex is historically more volatile than consumer spending, Cara said.

Before the financial crisis, many sectors aggressively added to their spending plans, reflecting the boom in commodity prices and expansion in Asia, Cara wrote.

"Most major market set-backs have come after a build-up of excess capacity as companies over-invest for a future world that disappoints," Cara said.

The severity of the current financial crisis is expected to heavily impact capital expenditure with construction, chemicals and industrial goods being hit the worst, he said.

But the lack of capacity caused by the pullback in capex will eventually provide a basis for the economic and market recovery, Cara added.