Euro-Area Economy Shrinks

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An employee works on Bosch Cp4 diesel pumps as they move along the production line at the Robert Bosch GmbH headquarters in Stuttgart, Germany, on Feb. 1, 2012. Close

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The economies of Spain, Belgium, Italy and Portugal also contracted in the final three months of 2011. Close

The economies of Spain, Belgium, Italy and Portugal also contracted in the final three months of 2011.

Europe’s economy shrank less than economists forecast in the fourth quarter as a better-than- predicted performance in Germany and France helped mitigate the region’s first contraction since 2009.

Gross domestic product in the 17-nation euro area fell 0.3 percent from the prior three months, the first drop since the second quarter of 2009, the European Union’s statistics office in Luxembourg said today. Economists had forecast a drop of 0.4 percent, the median of 42 estimates in a Bloomberg News survey shows. In Germany, Europe’s largest economy, GDP dropped less than economists projected in the fourth quarter, while France’s economy unexpectedly expanded in that period.

German companies have boosted output and spending over the past year to meet export demand, helping soften the impact of tougher budget cuts from Spain to Ireland. While Moody’s Investors Service cut the ratings of six of the region’s member states on Feb. 13, saying policy makers haven’t done enough to restore investor confidence, the economy is showing some signs of stabilization. Euro-region economic sentiment improved in January and services output expanded.

“It could have been worse,” said Martin van Vliet, an economist at ING Group in Amsterdam. “The debt crisis has thrown the euro-zone recovery into reverse. The recent improvement in leading indicators suggests there is a fair chance that the euro-zone economy as a whole might not shrink further in the first quarter.”

Economic Stabilization

The euro was little changed against the dollar after the data, trading at $1.3174 at 11:19 a.m. in Frankfurt, up 0.3 percent on the day. The Euro Stoxx 50 Index advanced as much as 1.1 percent, reversing yesterday’s losses.

Recent surveys indicate the pace of contraction won’t accelerate in the current quarter. Euro-region services output expanded in January after shrinking in the previous four months and economic confidence increased the first time in almost a year. In Germany, investor confidence jumped to a 10-month high in February and business sentiment rose in January.

European Central Bank President Mario Draghi has pointed to signs of stabilization in the euro-area economy and said the ECB averted a credit crunch with its three-year loans to lenders in December. The central bank will offer a second round of financing, known as LTRO, at the end of this month.

‘Growth Pause’

German GDP fell 0.2 percent from the third quarter, when it rose 0.6 percent, the Federal Statistics Office in Wiesbaden said today. Economists in a Bloomberg survey forecast a drop of 0.3 percent. France’s economy grew 0.2 percent in that period.

“The German economy only took a growth pause and is not approaching a new recession,” said Carsten Brzeski, a senior economist at ING Group in Brussels. “Of course, a quick rebound is not an automatism and the big unknown for the German economy remains the sovereign-debt crisis.”

Governments across the euro region may find it harder to plug their budget gaps as an economic slump deepens. Greece’s GDP slumped 7 percent in the fourth quarter from a year earlier, according to a report yesterday. The economies of Spain, Belgium, the Netherlands, Italy and Portugal also contracted in the final three months of 2011.

Brussels Meeting

In the 27-member EU, GDP dropped 0.3 percent in the fourth quarter after rising 0.3 percent in the previous three months. In Hungary, the economy expanded 0.3 percent from the third quarter, while Bulgarian GDP advanced 0.4 percent and the Czech Republic reported a drop of 0.3 percent, reports showed today.

European finance ministers canceled a Brussels meeting slated for today and will hold a teleconference instead to prod Greece to do more to clinch an aid package worth 130 billion euros ($171 billion), along with about 100 billion euros of debt relief from private bondholders. Greece needs more money to make a 14.5 billion-euro bond payment on March 20.

“I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the program,” Luxembourg Prime Minister Jean- Claude Juncker, who heads meetings of euro-region finance ministers, said yesterday. He pressed for “further technical work” on Greek budget cuts.

More than two years after the debt crisis emerged in Greece, European leaders face international pressure to do more to tackle the source of contagion that threatens to drag down the global economy. Group of 20 nations have signaled they won’t reach a consensus on crisis aid for Europe via the International Monetary Fund at a Feb. 24-26 meeting of finance chiefs until Europe increases the size of its firewall.

‘Severe Implications’

The Bank of England said today the U.K. economy remains weak because of the government’s fiscal squeeze and the euro- region debt crisis, saying that failure to end the turmoil would have “severe implications” for growth. The central bank started a 50 billion-pound ($78 billion) round of bond purchases this week after the economy shrank in the fourth quarter.

The region’s crisis is also affecting companies. BNP Paribas SA (BNP), France’s largest bank, said today that fourth- quarter profit dropped 51 percent, hurt by writedowns on Greek sovereign debt. MAN SE (MAN), the German truckmaker controlled by car manufacturer Volkswagen AG (VOW), said yesterday that sales and operating profit will decline in 2012 as the debt crisis discourages companies from investing.

Euro Recession

“Despite some recent improved euro-zone surveys and evidence that Germany is returning to growth, we doubt that the euro zone will be able to avoid further contraction in the first quarter,” said Howard Archer, chief European economist at IHS Global Insight in London. “We expect the euro zone to start growing gradually again during the second half.”

In a separate report today, the EU statistics office said that euro-region exports rose 0.1 percent in December from the previous month, when adjusted for seasonal swings. Imports fell 0.9 percent from November and the trade surplus widened to 7.5 billion euros from 6.1 billion euros.

Some companies are relying on faster-growing markets to bolster sales. Hermes International SCA (RMS), the French maker of Birkin bags, reported full-year sales on Feb. 9 that beat its own forecast, led by a 29 percent surge in Asia. The same day, Daimler AG (DAI) forecast higher 2012 profit than analysts had predicted, propelled by record demand for Mercedes-Benz cars.

“The U.S. certainly is the bright spot as far as the development in the recent months is concerned,” Daimler Chief Executive Officer Dieter Zetsche said. “We see a buildup in momentum there. We’re bullish about the further development in China.”

The euro region’s statistics office is scheduled to publish the breakdown of euro-area fourth-quarter GDP next month.

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

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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