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Euro zone economy falls deeper than expected into recession

A German, French and an EU flag flutter over the German lower house of parliament in Berlin January 22, 2013. REUTERS/Fabrizio Bensch
A German, French and an EU flag flutter over the German lower house of parliament in Berlin January 22, 2013. REUTERS/Fabrizio Bensch

By Philip Blenkinsop and Annika Breidthardt

BRUSSELS/BERLIN (Reuters) - The euro zone slipped deeper than expected into recession in the last three months of 2012 after its largest economies, Germany and France, shrank at the end of a wretched year for the region.

It marked the currency bloc's first full year in which no quarter produced growth, extending back to 1995. For the year as a whole, gross domestic product (GDP) fell by 0.5 percent

Economic output in the 17-country region fell by 0.6 percent in the fourth quarter, EU statistics office Eurostat said on Thursday, following a 0.1 percent output drop in the third.

The quarter-on-quarter drop was the steepest since the first quarter of 2009 and more severe than the average forecast of a 0.4 percent drop in a Reuters poll of 61 economists.

Within the zone, only Estonia and Slovakia grew in the last quarter of the year, although there are no figures available yet for Ireland, Greece, Luxembourg, Malta and Slovenia.

The big economies set the tone.

Germany contracted by 0.6 percent on the quarter, official data showed, marking its worst performance since the global financial crisis was raging in 2009.

France's 0.3 percent fall was also slightly worse than expectations.

Worryingly for Berlin, it was export performance - the motor of its economy - that did most of the damage, declining significantly more than imports, although economists expect it to bounce back quickly.

The euro hit a session low against the dollar after the weaker than forecast German reading and dropped again after the release of full euro zone figures.

Back revisions to the French figures showed its output fell by 0.1 percent in each of the first and second quarters of 2012, meaning the country has already experienced one bout of recession in the last twelve months.

While the European Central Bank's pledge to do whatever it takes to save the euro has taken the heat out of the bloc's debt crisis, even its stronger members are gripped by an economic malaise that could push debt-cutting drives off track.

French Prime Minister Jean-Marc Ayrault acknowledged for the first time on Wednesday that weak growth was putting his government's deficit goal for 2013 out of reach.

Resilient Germany is expected to rebound and the bloc as a whole is expected to have improved in the first quarter, as suggested by a pick-up of factory orders in December, but it is not yet clear if growth has returned.

Nick Kounis, economist at ABN AMRO, said the decline of fears the euro could break apart and cheap credit had sown the seeds for the recovery.

"However, ongoing severe budget cuts, rising unemployment, bank deleveraging all point to the recovery being excruciatingly slow," he said, adding the strong euro was also a threat.

The ECB has a wide-ranging projection for euro zone GDP growth in 2013 of between -0.9 and +0.3 percent. ECB Vice President Vitor Constancio said on Tuesday he expected no major change to the forecasts in March.

WEAK PERIPHERY

Dutch GDP dropped 0.2 percent over the quarter, keeping it in recession, and the Austrian economy shrank at the same rate.

For the more embattled members of the currency bloc, matters are worse. The greatest reported decline was in bailed-out Portugal, down 1.8 percent.

Italy suffered its sixth successive quarterly fall in GDP - this time by a sharp 0.9 percent - putting it into a longer slump than it suffered in 2008/2009.

Its recession has been deepened by austerity measures that outgoing Prime Minister Mario Monti introduced to stave off a debt crisis.

With an election due on February 24/25, all sides in a three-way race between Monti's centrist bloc, Pier Luigi Bersani's center-left coalition and Silvio Berlusconi's center-right are pledging to cut taxes to try to kickstart economic growth.

Spain, the euro zone's fourth largest economy, released figures two weeks ago which showed it remained deep in recession after a 0.7 percent contraction in the fourth quarter.

Madrid is also pressing on with austerity measures to cut its debt but may be given more time to meet its deficit targets by the European Commission if its economy worsens further.

There are signs that countries like Spain are starting to benefit from internal devaluations - marked by wage falls and job losses aimed at making companies leaner and more productive.

The ECB predicts the euro zone will pick up later in the year although its currency, if it keeps strengthening, could quickly snuff out any of those hard-won competitive advantages for its high debt members.

More recent data for January have already suggested some upturn in the first months of 2013, in the bloc's stronger members at least, and if improvement comes it is expected to be seen in Germany first.

(Additional reporting by Steve Scherer, Vicky Buffery, Robert-Jan Bartunek, Ethan Bilby, writing by Mike Peacock, editing by Jeremy Gaunt)

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