Euro-Zone Economy Contracts Sharply

Via The Wall Street Journal

By NICHOLAS WINNING

The euro zone plunged deeper into recession in the fourth quarter of last year with its sharpest contraction in gross domestic product since records began in 1995, data from the European Union's Eurostat statistics agency showed Friday.

The decline was led by the biggest quarterly fall in German GDP in more than two decades. France and Italy also reported severe downturns as the global financial crisis throttled demand and output at home and in the region's main trading partners.

Eurostat said euro-zone GDP contracted 1.5% on a quarter-to-quarter basis and fell 1.2% on an annualized basis, the biggest falls by both measures on record. In the third quarter, GDP shrank 0.2% on a quarterly basis, but grew 0.6% on a year-to-year basis.

The fourth-quarter figures were even weaker than the market consensus estimate of a 1.3% quarterly drop and 1.2% decline on an annualized basis from a Dow Jones Newswires survey of economists last week.

The data are likely to support expectations that the European Central Bank will cut its benchmark interest rate again in March. The ECB has lowered rates to 2.0% from 4.25% in October as weaker energy prices fueled a sharp slowdown in inflation in the region.

In the third quarter, the euro zone entered recession for the first time since it was formed in 1999. Since then, business and consumer confidence has dropped to all-time lows, industrial output has fallen at a record pace, unemployment has risen to a two-year high, and demand in many of the euro zone's main trading partners has weakened.

Figures released earlier by Germany, France and Italy, the euro zone's three biggest economies, suggested the euro-zone figure would be very weak.

German economic growth posted its sharpest quarterly fall since 1987, as machinery investment and exports nose-dived, data from its Federal Statistics Office showed Friday. Real GDP declined 2.1% from the third quarter, when adjusted for seasonal and calendar effects, well below economists' forecasts of a 1.8% quarterly fall.

This was the third quarter in a row that German GDP declined, after falling by 0.5% in the second and third quarters of 2008 respectively from the quarter-earlier periods. The loss also marked the sharpest quarterly drop in GDP since the first quarter of 1987, when GDP declined by 2.5%.

Germany, the euro zone's largest economy, is widely expected to contract 2%-3% this year, which would mark the steepest decline since World War II.

France's finance ministry, meanwhile, said late Thursday that GDP in the euro zone's second-biggest economy contracted 1.2% in the fourth quarter -- also more than the 1.0% decline expected by market participants. It said GDP should contract by at least 1.0% this year on average. In a radio interview earlier Friday, French Finance Minister Christine Lagarde said the country was, "clearly in a recession."

In Italy, GDP shrank 1.8% on a quarter-to-quarter basis between October and the end of December, the sharpest decline since 1980, after contracting 0.6% in the third quarter.

Eurostat said the EU economy as a whole slipped into recession in the final quarter of last year. EU GDP shrank 1.5% on a quarter-to-quarter basis after declining 0.2% in the previous three-month period.

—Nina Koeppen contributed to this article.