The euro-area economy stalled in the first quarter as companies cut spending to weather the sovereign-debt crisis, offsetting a gain in exports.
Gross domestic product in the 17-nation euro area was unchanged from the fourth quarter, when it fell 0.3 percent, the European Union’s statistics office in Luxembourg said today, confirming an initial estimate published on May 15. Exports rose 1 percent in that period, while corporate investment declined 1.4 percent. Construction dropped 1.1 percent.
The euro-area economy may struggle to gather strength after the need for new Greek elections and Spain’s worsening banking crisis heightened concerns that the euro could splinter. Spanish industrial output had the biggest annual drop in more than two years in April and German production declined from the previous month, reports showed today. European economic confidence slumped to the lowest in 1 1/2 years last month.
“The euro zone escaped technically moving into recession by the skin of its teeth,” said Howard Archer, chief European economist at IHS Global Insight in London. “There can be little doubt that the euro zone will suffer renewed, appreciable contraction in the second quarter and prospects for the third quarter hardly look encouraging.”
The euro has dropped 6.4 percent against the dollar over the past month, bringing the decline this year to 4.3 percent. The common currency traded at $1.2502 at 11:54 a.m. in Brussels, up 0.4 percent on the day.
Government spending rose 0.2 percent in the first quarter from the previous three months, when it fell 0.1 percent, today’s report showed. Household consumption stagnated and imports rose 0.1 percent from the fourth quarter.
Finance ministers and central bank governors from the Group of Seven economies yesterday agreed to coordinate their response to the fiscal crisis, which already has pushed eight euro-area nations into recessions, commonly defined as two consecutive quarters of contraction. The G-7 officials discussed “progress toward financial and fiscal union in Europe” on a conference call focused on Spain and Greece, officials said.
The European Commission said on May 11 that the euro-area economy may shrink 0.3 percent this year before returning to growth in 2013. The euro area emerged from its last economic slump in the third quarter of 2009 after the European Central Bank cut borrowing costs to a record low. The German economy, whose expansion of 0.5 percent helped avert a euro-area recession in the first quarter, may grow 0.7 percent in 2012, the Brussels-based commission said.
While rising German exports helped drive growth in that nation in the first three months of 2012, indicators show that Europe’s largest economy has since weakened. German business confidence fell more than economists forecast in May, investors grew more pessimistic and manufacturing output declined. German industrial output fell 2.2 percent in April from the previous month, the Economics Ministry in Berlin said today.
In Spain, industrial output plunged 8.3 percent in April from a year earlier, when adjusted for the number of working days, the National Statistics Institute said. That was the steepest decline since October 2009 and followed a 7.5 percent drop in March.
Spain yesterday called for outside support for the first time to battle the financial crisis as Budget Minister Cristobal Montoro said EU institutions should help shore up the nation’s lenders.
Concern about Greece’s future in the euro mounted after elections last month failed to produce a government and saw support grow for parties opposed to austerity measures. A second ballot will be held on June 17.
Michael Derks, chief strategist at FXPro Financial Services Ltd. in London, said while the ECB may consider “another helicopter drop” of unlimited cash to fight the turmoil, the measure would just “buy a little time.”
“Europe’s sovereign debt and banking crisis has now reached the point of no return,” Derks wrote in an e-mailed note ahead of today’s report. “Recently, it has become abundantly clear that both Spain and Greece are now in a depression, which given their respective debt mountains, renders servicing and repaying their debt impossible.”
The ECB has shouldered the main burden of fighting the turmoil by flooding the banking system with over 1 trillion euros ($1.25 trillion) in cash, cutting borrowing costs and buying government bonds. The Frankfurt-based central bank today will probably keep its benchmark interest rate at 1 percent, matching a record low, according to a Bloomberg survey of economists.
ECB President Mario Draghi said on May 31 that it’s “not our mandate” to “fill the vacuum left by the lack of action by national governments.” ECB council member Andres Lipstok said in an interview on May 22 that “now it’s not very necessary to present any new measures.”
“Given the growing worries over the future of the euro zone, markets will be looking to the ECB for reassurance and guidance,” ING Bank in Amsterdam said in an e-mailed note ahead of today’s report. “The latest macro-economic data have clearly given the ECB more room for a possible rate cut.”
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