Euro-Area Economy Shrinks Most Since Depths of Recession

The euro-area recession deepened more than economists forecast with the worst performance in almost four years as the region’s three biggest economies suffered slumping output.

Gross domestic product fell 0.6 percent in the fourth quarter from the previous three months, the European Union’s statistics office in Luxembourg said today. That’s the most since the first quarter of 2009 in the aftermath of the collapse of Lehman Brothers Holdings Inc. and exceeded the 0.4 percent median forecast of economists in a Bloomberg survey.

The data capped a morning of releases showing that the economies of Germany, France and Italy all shrank more than forecast in the fourth quarter. European Central Bank President Mario Draghi said last week that confidence in the 17-nation bloc has stabilized and the ECB sees a gradual recovery beginning later this year, though the situation is “fragile.”

“The outlook for 2013 remains subdued,” said Peter Vanden Houte, an economist at ING Group NV in Brussels. “While a gradual improvement of the world economy is likely to support European exports, domestic demand is bound to remain very weak as fiscal tightening and rising unemployment will take their toll on household consumption.”

The euro extended its decline against the dollar after the data were released. It fell 0.9 percent to $1.3328 as of 10:34 a.m. London time. The single currency also weakened versus the pound and the yen. European stocks erased gains, U.S. equity- index futures fell, and German bunds advanced.

Japanese Surprise

The European data chimed with statistics in Japan, where the economy unexpectedly shrank last quarter as falling exports and a business investment slump outweighed improved consumption. GDP fell an annualized 0.4 percent, following a 3.8 percent fall in the previous quarter. That bolsters Prime Minister Shinzo Abe’s case for more monetary stimulus to end deflation.

The euro-area economy shrank 0.9 percent in the fourth quarter from a year earlier, the statistics office said. In 2012, it contracted 0.5 percent.

Data earlier today showed the German economy, Europe’s largest, shrank 0.6 percent in the fourth quarter, while French GDP fell 0.3 percent. Both contractions exceeded the median forecasts of economists. Italy’s economy shrank 0.9 percent, also more than expected and a sixth straight contraction.

Ninth Contraction

Other releases today showed that Portugal’s GDP fell by 1.8 percent in the ninth successive quarter of contraction, while in Austria and the Netherlands, it dropped 0.2 percent. In Greece, which doesn’t publish quarter-on-quarter data, GDP fell 6 percent in the fourth quarter from a year earlier.

Measures by the ECB to stem the debt turmoil have eased the worst strains and helped to reduce sovereign bond yields. The yield on Spain’s 10-year debt is about 5.2 percent, down from more than 7.5 percent in July.

Some reports have also pointed to an easing in the recession in the euro area since the start of this year. While industrial production fell 2.4 percent in the fourth quarter, it rose 0.7 percent in December, more than economists forecast. Surveys of manufacturing and services improved in January.

Downside Risks

Still, the ECB has predicted that the euro zone’s economy will shrink 0.3 percent this year. The appreciation of the euro, which gained 8.2 percent in the past six months, is also threatening to hurt exports.

The ECB said today that professional forecasters cut their growth and inflation estimates. They predict inflation of 1.8 percent in 2013 and 2014, down from the 1.9 percent estimated for both years three months ago, the central bank said, citing a quarterly survey. Forecasters foresee zero growth this year and expansion of 1.1 percent next year.

Heineken NV, the world’s third-biggest brewer, said yesterday it sees volume weakness this year in European markets “affected by continued economic uncertainty and government-led austerity measures.” ThyssenKrupp AG, Germany’s biggest steelmaker, said on Feb. 8 that it intends to make savings in its European steel business by cutting more than 2,000 jobs.

In the 27-nation European Union, GDP fell 0.5 percent in the fourth quarter from the previous three months and 0.6 percent on the year. The statistics office is scheduled to publish a breakdown of fourth-quarter GDP next month.

“While sentiment towards the region has improved, the hard news on the economy remains distinctly weak,” said Jonathan Loynes, chief European economist at Capital Economics in London. Surveys have pointed to an “improvement in sentiment and activity in the early part of 2013. But for now at least, they are not strong enough to suggest that the euro zone has pulled out of recession.”

To contact the reporter on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net

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

Enlarge image

Euro-Area GDP Slumps Most Since Depths of 2009 Recession

Kostas Tsironis/Bloomberg

A pedestrian passes a closed store advertising sales discounts in its empty window displays in Athens.

A pedestrian passes a closed store advertising sales discounts in its empty window displays in Athens. Photographer: Kostas Tsironis/Bloomberg

4:26

Feb. 14 (Bloomberg) -- Jens Larsen, chief European economist at RBC Capital Markets, discusses the euro-zone economy, gross-domestic product data released today and European Central Bank monetary policy. The euro-area recession deepened more than economists forecast as GDP fell 0.6 percent in the fourth quarter from the previous three months, the European Union's statistics office said. Larsen speaks with Guy Johnson and Francine Lacqua on Bloomberg Television's "The Pulse." (Source: Bloomberg)