Eurozone slump deepens

The eurozone 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 per cent

Economic output in the 17-country region fell by 0.6 per cent in the fourth quarter, EU statistics office Eurostat said on Thursday, following a 0.1 per cent 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 per cent 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 per cent on the quarter, official data showed, marking its worst performance since the global financial crisis was raging in 2009.

France’s 0.3 per cent 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 eurozone figures.

Back revisions to the French figures showed its output fell by 0.1 per cent 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 eurozone GDP growth in 2013 of between -0.9 and +0.3 per cent. ECB Vice President Vitor Constancio said on Tuesday he expected no major change to the forecasts in March.

Dutch GDP dropped 0.2 per cent 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 per cent.

Italy suffered its sixth successive quarterly fall in GDP - this time by a sharp 0.9 per cent - 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.