Euro-Region Economy Contracts as Investment, Exports Decline

European Economy Shrank in Fourth Quarter
Finished wind turbine blades stored ahead of shipping at the Siemens AG plant in Aalborg, Denmark. Siemens AG, Europe's largest engineering company, forecast stagnant profit for next year as sales growth moderates and the global economy cools, sending the shares to their lowest in more than a month. Photographer: Timothy Fadek/Bloomberg

Europe’s economy contracted in the fourth quarter as investment declined by the most since 2009 and exports and consumer spending dropped.

Gross domestic product shrank 0.3 percent from the third quarter, the European Union’s statistics office said today, confirming an estimate published on Feb. 15. Exports fell 0.4 percent after a 1.4 percent gain in the previous three months, while household spending declined 0.4 percent and investment dropped 0.7 percent.

While Europe is facing its second recession in less than three years, the economy shows “tentative signs of stabilization,” European Central Bank President Mario Draghi has said. ECB efforts to pump cash into the economy have helped ease concern about a credit crunch and won governments time to agree on measures to contain the debt crisis.

“The region is still facing major headwinds, notably including increased fiscal tightening in many countries and markedly rising unemployment,” said Howard Archer, chief European economist at IHS Global Insight in London. “Despite some recent overall improvement in 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 of 2012 and very possibly the second.’”

European investor confidence rose for a third month in March, the Sentix research institute said yesterday.

ECB Loans

The ECB lent 800 banks 529.5 billion euros ($698 billion) for three years last week in the biggest single refinancing operation in its history, taking total long-term lending above 1 trillion euros. Euro-area finance ministers the same week authorized the region’s bailout fund to raise money for Greece’s bond exchange, the first step in releasing funds from a 130 billion-euro rescue package.

ECB policy makers including Draghi and Ewald Nowotny from Austria said they expect the central bank loans will be channeled to households and companies, helping to boost the so-called real economy.

The economy will likely be “turning the tide in the coming months,” Olli Rehn, the EU’s commissioner for economic and monetary affairs, said today.

So far, the Stoxx Europe 600 Index has gained 8.8 percent and yields on debt of European sovereigns and banks have tumbled. Germany’s Audi AG, the world’s second-largest maker of luxury vehicles, said March 1 that it is targeting 2012 profit “on par” with last year’s record results as higher sales offset increased spending on new models and factories.

Shrinking Services

Even so, euro-area services output shrank more than estimated in February, led by Italy and Spain, a survey of purchasing managers showed yesterday.

The 17-nation euro economy may shrink 0.3 percent this year, driven by a contraction of 1.3 percent in Italy and 1 percent in Spain, the European Commission said on Feb. 23. Germany’s economy, Europe’s largest, will expand 0.6 percent, according to the commission.

The ECB will leave its benchmark lending rate at 1 percent when policy makers meet in Frankfurt on March 8, according to the median of 58 forecasts in a Bloomberg News survey, giving officials time to weigh the impact of the cash injection and consider new economic and inflation forecasts which will be released on that date.

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