Euro-Area Recession Deepens as Slowdown Exceeds Estimates

The euro-area economy shrank more than economists forecast in the three months through March, extending a recession to a record sixth quarter and increasing pressure on the currency bloc’s leaders to spur growth.

Gross domestic product in the 17-nation euro zone fell 0.2 percent after a 0.6 percent decline in the previous quarter, the European Union’s statistics office in Luxembourg said today. The median of 39 estimates in a Bloomberg News survey was for a 0.1 percent contraction. From a year earlier, the economy shrank 1 percent.

The slowdown has spread to the euro core. The German economy, Europe’s largest, expanded less than forecast in the first quarter. France slipped into a recession and Italy’s contraction exceeded estimates. The European Central Bank cut its benchmark interest rate to a record low of 0.5 percent this month and President Mario Draghi said the ECB is ready to act again if needed.

The first-quarter contraction “reinforces pressure on the ECB to come up with further measures to try and support euro-zone growth,” said Howard Archer, an economist at IHS Global Insight in London. “An interest rate cut to 0.25 percent looks ever more possible, while the ECB will also continue to look into the case for a negative deposit rate and ways of getting more credit through to smaller companies.”

‘In Sight’

The euro extended losses after the data were released and was trading at $1.2862 at 1:15 p.m. in Brussels, down 0.5 percent on the day. The Stoxx Europe 600 Index was up 0.5 percent to 307.24.

The euro area’s economic gloom contrasted with the U.K., where Bank of England Governor Mervyn King declared that a recovery is now “in sight” as he presented his final forecasts with an improved outlook for U.K. growth.

“Of most significance today is that there is a welcome change in the economic outlook,” King said in London. “This hasn’t been a typical recession, and it won’t be a typical recovery.”

In the central bank’s quarterly Inflation Report, officials predicted that growth may accelerate to 0.5 percent this quarter from 0.3 percent in the first three months of the year. The central bank sees inflation peaking at 3.1 percent in the third quarter of this year, lower than expected in February.

In Australia, Treasurer Wayne Swan made clear he’ll eschew European-style austerity as a stronger currency slows growth.

‘Social Destruction’

“To those who would take us down the European road of savage austerity I say the social destruction that comes from cutting too much, too hard, too fast is not the Australian way,” Swan told parliament in Canberra yesterday. “The alternative, cutting to the bone, puts Australian jobs and our economy at risk.”

U.S. Treasury Secretary Jacob J. Lew said European policy makers are still falling short in efforts to revive their economy, intensifying pressure on them to further ease their budget-cutting. “Europe is going to need to do a little bit better,” Lew said last week. “There’s room for progress.”

The ECB forecasts that the euro economy will shrink 0.5 percent this year. That compares with the European Commission’s projection of a 0.4 percent contraction.

Still, the euro area is forecast to pull out of its recession as the economy stagnates in the second quarter and returns to growth in the third, according to a Bloomberg News survey of economists.

‘Subdued Recovery’

Sovereign borrowing costs have dropped across the bloc this year. The yield on Spain’s 10-year debt was at 4.35 percent at 12:11 p.m. in Brussels, compared with a euro era high of 7.75 percent in July, a day before Draghi pledged to do whatever was necessary to hold the single currency together. The yields for similar maturities were at 1.39 percent for Germany, 1.95 percent for France and 4.01 percent for Italy.

“A subdued recovery in the second half of the year is still possible, but that requires an improvement in confidence,” said Peter Vanden Houte, an economist at ING Bank NV in Brussels. “Therefore it is imperative that euro-zone leaders maintain the momentum in the strengthening of the monetary union, with the banking union as a first important hurdle to be taken.”

Eurostat data showed the German economy expanded 0.1 percent in the first quarter, while France contracted 0.2 percent and Italian output dropped 0.5 percent. The 27-nation EU economy shrank 0.1 percent in the quarter.

Record Unemployment

Euro-area unemployment has reached a record 12.1 percent as governments increase taxes and cut spending to contain public deficits. Alstom SA, the world’s third-largest power-equipment maker, last week cut its profitability forecast amid lower demand from local utilities in Europe.

“I think when Europe stabilizes, we’ll emerge in a really positive way,” said Richard Cousins, chief executive officer of Compass Group Plc, the world’s biggest catering company. “Our working assumption is to say Europe’s going to remain as it is for at least the next 18 months.”

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