May 15 (Bloomberg) -- Europe’s economy contracted at the fastest pace in at least 13 years in the first quarter as companies cut output and jobs to survive the worst global slump in more than six decades.

Gross domestic product in the 16-member euro region fell 2.5 percent from the fourth quarter, the biggest decline since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today. That exceeded the 2 percent contraction economists expected in a Bloomberg survey and followed a 1.6 percent drop in the prior three months.

The deepest global recession since World War II is curbing European exports and eroding consumer demand, forcing companies to cut spending and jobs. The German and Italian economies also contracted by the most on record. Hong Kong’s economy shrank at the fastest pace since at least 1990, prompting the government to forecast a full-year contraction of as much as 6.5 percent.

“The recession is an exceptionally deep one,” said Kenneth Wattret, chief euro-region economist at BNP Paribas in London. “The headwinds to growth are considerable, consistent with output contraction and sharply rising unemployment for some time to come.”

From a year earlier, the euro-area economy shrank 4.6 percent, also the biggest decline on record, today’s report showed. The statistics office is scheduled to publish a breakdown of first-quarter GDP on June 3.

Biggest Drop

In Germany, Europe’s largest economy, GDP dropped 3.8 percent in the first quarter from the previous three months. That’s the biggest drop since data were first compiled in 1970. Italian GDP fell 2.4 percent, the most since records began in 1980, and the French economy shrank 1.2 percent in that period. The economies of the Netherlands and Austria also contracted.

The slump in western Europe is hurting its neighbors to the east by cutting demand for their exports and crippling foreign investment in the former communist states. Five eastern members of the EU reported first-quarter contractions today, with Latvia showing an annual GDP decline of 18 percent, the sharpest in Europe. Hungary and Romania reported 6.4 percent drops.

The euro was lower against the dollar following the GDP data. The European currency traded at $1.3581 at 4:10 p.m. in Brussels, down 0.4 percent.

While policy makers have expressed optimism that the global recession may be easing, recent reports indicate any recovery is likely to be slow. The world economy will shrink 1.3 percent this year and only return to growth in 2010, according to forecasts by the International Monetary Fund, which has led bailout packages for Hungary, Romania and Latvia.

‘Slow and Protracted’

Bank of England Governor Mervyn King said on May 13 that the U.K.’s recovery will be “slow and protracted.” In the U.S., the world’s biggest economy, rising unemployment may restrain consumer spending, the biggest part of GDP. In a sign manufacturing may be stabilizing, U.S. industrial output fell in April at the slowest pace in six months, data today showed.

In Europe, Munich-based Bayerische Motoren Werke AG, the world’s largest luxury-car maker, is among companies cutting jobs and curtailing production to weather a drop in demand. In April, vehicle sales of the BMW brand dropped about 23 percent, Chief Executive Officer Norbert Reithofer said on May 6.

“It’s too early to sound the all-clear,” Reithofer said that day. “We don’t anticipate a stable recovery before 2010.”

Rising Unemployment

As the global slump curbs orders and rising unemployment undermines consumer spending, companies are being forced to hold the line on prices. Euro-area inflation remained at a record-low 0.6 percent in April, separate data showed today. That is less than half the European Central Bank’s aim of just below 2 percent, and an EU gauge of price expectations turned negative last month for the first time since 1990.

While declining prices leave consumers with more money to spend, companies may not be able to count on household demand to bolster earnings this year. The EU earlier this month forecast unemployment will jump to 11.5 percent next year with the highest rates expected in Spain and Ireland. The region’s jobless rate is currently at 8.9 percent, a three-year high.

Rome-based Bulgari SpA, the world’s third-largest jeweler, this week reported its first quarterly loss in a decade on slumping sales. Jean-Paul Agon, chief executive officer of Paris-based L’Oreal SA, the world’s largest cosmetics maker, earlier this month called the first quarter “tough.”

Covered Bonds

The ECB on May 7 lowered its benchmark interest rate to 1 percent, a record low, and pledged to buy 60 billion euros ($82 billion) of covered bonds, securities backed by mortgages and public-sector loans, to stimulate the economy. Details of the asset-purchase plan are to be unveiled next month.

“We expect the ECB to keep interest rates down at the current level until well into 2010 and it’s very possible that they could be trimmed further,” said Howard Archer, chief European economist at IHS Global Insight in London. “It is also very possible that the ECB could ultimately extend and widen its asset-purchase scheme if recent green shoots wither away.”

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

Last Updated: May 15, 2009 10:12 EDT