The U.K. economy unexpectedly shrank by 0.4% in the third quarter this year, officially sending the region into its longest recession since record-keeping began more than 50 years ago.  (Why the United Kingdom is hurting).

Edmund Conway and Andrew Porter for Telegraph U.K. report that adding insult to injury is that the United Kingdom has fallen beneath Italy for the first time since the mid-1990s to become the world’s seventh-largest economy. (When will Italy rebound?)

Blame two things: the devaluation of the British pound and the severity of the recession overall. France surpassed the United Kingdom last year. (Tom talks Europe on CNBC).

Italy first surpassed Britain’s economy in 1987. The milestone is being hailed as  confirmation that Italy has proved its resilience.

For more stories about Italy or United Kingdom, visit the corresponding categories.

• iShares MSCI Italy Index (NYSEArca: EWI): up 30% year-to-date

• iShares MSCI United Kingdom (NYSEArca: EWU): up 33.5% year-to-date

According to Gary Gordon for ETF Expert, there is a slight discernible difference between the five largest net exporters and net importers as shown in their respective ETF growths.

Net importers’ five-year total % change:

• Vanguard Total U.S. Market (NYSEArca: VTI): 12.8%
• iShares MSCI United Kingdom (NYSEArca: EWU): 10.7%
• iShares MSCI Spain (NYSEArca: EWP): 91.7%
• iShares MSCI France (NYSEArca: EWQ): 35.1%
• The India Fund (NYSE: IFN): 129.4%

Net exporters’ five-year total % change:

• iShares FTSE China 25 Index (NYSEArca: FXI): 173.9%
• iShares MSCI Germany (NYSEArca: EWG): 53.9%
• Central Europe/Russia Fund (NYSE: CEE): 91.3%
• iShares South Korea (NYSEArca: EWY): 90.5%
• iShares MSCI Netherlands (NYSEArca: EWN): 46.3%

The data shows that percentage gains are leaning toward exporters and developing countries, more export-dependent, are producing larger percentage returns.

Gordon makes the distinction that successful investing in seemingly export-type countries is more dependent on overall economic growth and less to do with the large “net exporter” moniker.

For more information on ETF trends, visit our trend following category. Read more of Gary Gordon’s ETF observations at ETF Expert.

Max Chen contributed to this article.

Before the recession, Britain had the world’s highest debt levels relative to discretionary income. But recently, savings rate in the United Kingdom has more than doubled and domestic spending on luxury goods has declined at its fastest rate in decades, writes Mark Scott for BusinessWeek.

Britain’s GDP contracted 5.5% year-over-year in the second quarter, and unemployment is at 7.8% and rising. Prime Minister Gordon Brown cut value-added sales tax to 15% from 17.5% last year and issued a $495 million cash for clunkers program to stimulate domestic consumption.

Consumers are still being tight-fisted with their money. Non-food sales fell 0.7% year-over-year between June to August. Pessimism over the length of the recession has kept consumer confidence at a 12-month low.

Personal borrowing from loans, credit cards and mortgages dropped $1 billion in July. While it’s not helping now, increased saving should be beneficial in the long run since personal debt levels are at 183% of disposable income.

• iShares MSCI United Kingdom Index (NYSEArca: EWU): up 31% year-to-date

For more information on the United Kingdom, visit our United Kingdom category.

Max Chen contributed to this article.

Germany and France both reported increases in growth and the numbers have convinced some analysts that Europe’s economy is recovering, perhaps even faster than that of the United States’, reports Charlie Parker for Citywire.

There are some risks, though:

• Some economists think, however, that the improved numbers may not be a show of overall economic strength but rather a fall in imports as exports remain the same, which would come up as a stronger net trade.

• The unemployment rates in Germany and France may also be misleading because of the larger public sector. It is seen that the fall in production in Europe did not reflect an equal fall in unemployment. The economies could suffer later from the excess weight.

• The European Central Bank has cut its benchmark interest rate to a record 1% low and begun a $86 billion program of buying assets, writes Simon Kennedy for Bloomberg. Officials are regarding the economic recovery with caution and won’t be reversing their policies any time soon.

• The ECB projected that the European economy may contract 4.6% this year and contract 0.3% in 2010. Deutsche Bank estimates a 1.3% contraction next year and UBS AG predicts 2.1%.

One way to access the European market is through the PowerShares FTSE RAFI Europe (PEF) ETF. PEF, currently up 42% year-to-date, tracks the performance of the largest European equities in the FTSE RAFI Europe Index, which normally invest 90% of its total assets in securities that comprise the Index and ADRs based on securities in the Index, as stated by InvescoPowerShares. The ETF has 526 holdings with an expense ratio of 0.75%.

• Country allocations: United Kingdom 30.6%, France 14.7%, Germany 13.3%, Italy 7.6%, Switzerland 6.4%, Netherlands 5.8%, Spain 5.3%, Sweden 4.0%, Ireland 2.6%, Belgium 2.5%

For more information on Europe, visit our Europe category.

Max Chen contributed to this article.

Could Be Better

• The United Kingdom is deeper in a recession than previously thought, and this will lessen the inflationary pressures and keep them under the central banks’ 2% estimate. Official interest rates will rise slowly and the recovery should be slow yet steady.

• Matthew Saltmarch for The New York Times reports that unemployment is at its highest rate in 14 years, as companies are still cutting jobs. The puzzling thing is that fundamental indicators are signaling that the global recession is easing.

Good

• Household and business confidence have rebounded from their low levels seen last fall

• The central bank’s asset purchase program may have helped ease the lending crisis; the central bank has expanded this program

The Bank of England governor Mervyn King attacked the big banks for their role in tipping the world into a deep recession, one with which the United King is still wrestling . Katie Allen and Ashley Seager for Guradian report that British banks, households and government have high levels of debt that will keep a recovery on a slow path for the time being.

• iShares MSCI United Kingdom (EWU): up 22.8% year-to-date

For more stories about United Kingdon, visit our global ETF category.

Weak earnings reports were a partial driving force for the pullback in the markets.  Software king Microsoft (MSFT) reported its first-ever annual decline in sales of its Windows operating system.  Additionally, the company reported a decline in profits of 29%, which resulted in a profit of $0.36/share and disappointed Wall Street and investors.   The news sent the Technology Select Sector SPDR (XLK) down nearly 1.6% in intraday trading.

More disappointing earnings news came from online retailer Amazon (AMZN), which failed to meet or beat Wall Street’s estimated quarterly earnings target and reported weaker-than-expected sales.

New York based financial company CIT Group (CIT) announced that it sweetened some terms of its $1 billion buyback debt plan to entice investors and make the offer successful, enabling the company to save itself a bankruptcy filing. Under the amended terms, more principal will be added to the senior notes if paid back earlier.

The federal minimum wage was raised today, to $7.25 an hour up from $6.55. While most states have their own minimum wage, they’re required to pay whichever is higher. This means that in 29 states, workers will be getting a raise.

The United Kingdom reported a contraction of its economy at a level twice as high as anticipated. With credit remaining restricted, world trade weak and consumers and business trying to pull themselves up by their bootstraps, the nation’s economy continues to struggle.  The discouraging news sent the iShares MSCI United Kingdom Index (EWU) down 0.6% in morning trading.

U.S. consumer confidence fell for the first time in five months as mounting unemployment an depressed wages shook households.  The Reuters/University of Michigan final index of consumer sentiment decreased to 66 in July, from 70.8 in June. The confidence index fell as consumers are worried about their jobs and the overall health of the economy.

The California state Senate passed a $26 billion budget deficit plan, which eliminates nearly 60% of the deficit with spending cuts to core state services such as education, state parks and prisons.  Closing the shortfall is expected to allow the state to obtain short-term loans, eventually ending the need for the state-issued IOUs, states Judy Lin of the Associated Press.

Overall, all three U.S. indexes are down in morning trading.  The Dow Jones Industrial Average retreated 0.6%, the S&P 500 gave back 1% and the Nasdaq is down 1.6%.

For more stories on technology, visit our technology category.

Kevin Grewal contributed to this article.

Peter Mandelson, deputy to Gordon Brown, says the worst of the recession is over, according to the Economist. Businesses and purchasing managers have reported improvements in manufacturing and increases in output. Residential builders are relieved with a possible stabilization of the housing market.

But the favorable signs are now being followed by poor economic data with a GDP drop of 2.4%, up from earlier projected 1.9%, in the last three months of 2009 and the first quarter of 2009. Output was down 4.9%, compared to the previous estimated 4.1%, since the start of 2008.

Auspicious signs of the economy are turning up. Some have reasoned that the severe downturn was because firms rapidly reduced their inventories. Eventually, companies will have to satisfy demand from new production, boosting the economy.

Monetary and fiscal policies are working to revive the economy. The Bank of England is keeping rates at a low of 0.5% and supplying $206 billion, or 9% of GDP. Fiscal policy is rather loose, so much so that some are worrying about the future plans for fixing the budget deficit.

• iShares MSCI United Kingdom Index (EWU): up 5.9% year-to-date

For more information on the United Kingdom, visit our U.K. category.

Max Chen contributed to this article.

Marcus Lerox of The Times believes so because markets tends to converge as they develop.  Additionally, it is common practice to take American brands or names and introduce them internationally. Just take a look at fast-food giant McDonald’s (MCD).  This practice is starting to emerge across the pond in Europe as British company Kingfisher is looking to introduce its products in France.

Kingfisher believes that it can buy in bulk, cut costs, cross-pollinate products and introduce its products to a seemingly spend-happy French society. The downside of this is that there will be more common products across their business.  If this practice does take off and others jump on the bandwagon, it could have a positive impact on the iShares MSCI United Kingdom Index (EWU) which is up 7 year-to-date.

Software companies are also being urged to expand their target market group globally as opposed to just concentrating on local markets, states Rosemary Gallagher of Scotland on Sunday.  In fact, the practice is gaining such ground that ScotlandIS, which represents companies involved in information and communication technologies, has set up an export forum to support members that want to expand outside of Scotland.

Regardless of what happens, always watch the trend lines and have a strategy that you stick to when investing.

For more stories on retail, visit our retail and consumer category.

Kevin Grewal contributed to this article.

The Royal Institution of Chartered Surveyors says the U.K. housing market is showing signs of “stabilizing” in May and subsequently the sterling pound advanced against the dollar, reports Yasuhiko Seki for Bloomberg. The pound also rose against 12 of 16 of the most-active currencies.

Last week, the sterling had its biggest weekly loss in three months as uncertainty racked Prime Minister Gordon Brown’s Cabinet and calls for him to quit.

Local British pubs are closing up shop, straining under market forces, higher taxes and lifestyle changes, writes Henry Chu for The Los Angeles Times. More than 2,000 taverns have closed down since March of last year, leaving 20,000 jobless.

Government rules allow big chains to buy up or control most pubs, which leaves tenants that lease them earning less and less of the overall profits. Supermarkets have also been selling cheaper alcoholic beverages and alcohol duties are also rising. Alehouses also lost customers after the smoking ban instituted in 2007.

• iShares MSCI United Kingdom Index (EWU): up 12.2% year-to-date

• CurrencyShares British Pound Sterling Trust (FXB): up 12.1% year-to-date

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Max Chen contributed to this article.

Prime Minister Gordon Brown has increased borrowing to help their banking system and to goad the credit markets, and he has also cut taxes, reports Julia Werdigier for The New York Times.

On a positive note, Bank of England Monetary Policy Committee member Andrew Sentance said that the downturn is moderating, reports Reuters. While it’s too early to spot signs of economic recovery there or to predict the pace of such a recovery, the moderation is a positive signal.

But England still has big troubles to overcome.

The increased amount of government spending has thus created the highest debt level seen since World War II. The Treasury estimates the deficit will reach a minimum of $272 billion, or 12.4% of GDP, this year. The economy contracted 1.9% in the first quarter year-over-year, and the government predicts the economy will shrink 3.5% for the year. Unemployment is also expected to reach 3 million by year’s end.

Britain’s deteriorating finances and high debt has caused Standard & Poor’s to warn Britain about potentially losing its AAA credit rating. Most don’t think a downgrade is imminent or even likely. Moody’s Investors Service and Fitch Ratings are both keeping a stable rating for Britain.

The British government debt burden may reach 100% of GDP and hover there for the medium term. If the country lost its top-level credit rating then it would cause difficulties for Britain to raise more money through bond sales and it would be more expensive for to finance debt.

• iShares MSCI United Kingdom Index (EWU): up 9.1% year-to-date

Max Chen contributed to this article.