Euro-Area’s Recession Deepens on Slump in Investment, Exports

The euro-area recession deepened in the first three months of the year as investment and exports plunged, and the region may continue to struggle this quarter.

Gross domestic product fell 0.2 percent, the European Union’s statistics office in Luxembourg said today, confirming an estimate on May 15. Investment as measured by gross fixed capital formation dropped 1.6 percent, subtracting 0.3 percentage points off GDP. Separate reports showed retail sales fell more than forecast in April and services shrank last month.

Europe’s economy is grappling with a record slump as unemployment at a record high and government austerity measures damp domestic demand. While an index of manufacturing rose last month, it still indicates contraction, and the European Central Bank will probably keep its key interest rate at a record-low 0.5 percent tomorrow after cutting it last month.

“No meaningful recovery looks by any means certain for the euro zone,” Jonathan Loynes, chief European economist at Capital Economics Ltd. in London said in a telephone interview. “There isn’t any real strength anywhere, German household spending looks like it picked up a little but exports have slowed down pretty sharply due to a decline in global demand and investment is pretty weak as well.”

Exports fell 0.8 percent in the first quarter from the previous three months, while imports dropped 1.1 percent, today’s report showed. Consumer spending rose 0.1 percent and government spending declined 0.1 percent. Inventories had a neutral impact on GDP in the quarter.

Retail Sales

Efforts by euro-area authorities to calm the currency bloc’s debt crisis have yet to translate into an economic recovery. From a year earlier, the economy of the 17-nation euro area shrank 1.1 percent in the first quarter. In the 27-nation European Union, GDP fell 0.1 percent on the quarter and declined 0.7 percent from a year earlier.

Separate data today showed retail sales dropped 0.5 percent in April from March. Economists had forecast a 0.2 percent decline, according to the median of 22 estimates in a Bloomberg News survey. From a year earlier, retail sales were down 1.1 percent.

Also today, Markit Economics said its index of services activity rose to 47.2 last month from 47 in April. That’s below an initial estimate of 47.5 published on May 23.

OECD Forecasts

The euro-area economy has contracted for a record six straight quarters. The Paris-based Organization for Economic Cooperation and Development has forecast that it will shrink 0.6 percent this year and expand 1.1 percent in 2014, lagging behind the U.S. Alstom SA (ALO), the world’s third-largest power-equipment maker, cut its profitability forecast last month amid lower demand from local utilities in Europe.

The ECB will publish its new economic forecasts tomorrow after a monthly meeting of its Governing Council. ECB President Mario Draghi said this week that while the outlook is “challenging,” he still anticipates a pickup in growth this year.

“Our baseline scenario continues to be one of a very gradual recovery starting in the latter part of this year,” Draghi said in the text of a speech in Shanghai.

In Germany, Europe’s largest economy, GDP rose 0.1 percent in the first quarter, the EU report showed. France’s economy contracted 0.2 percent, while Italy and Spain shrank 0.5 percent.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

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

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