Eurozone Contracts at Record Rate

Eurozone growth contracted at its fastest ever rate at the end of last year, with an unexpectedly-bad German performance deepening the recession more than had been feared., Financial Times 2/13/2009 5:37:09 AM

Gross domestic product in the 16-country region slumped by 1.5 per cent in the final quarter of last year – the same pace of contraction as in the UK but faster than the 1 per cent fall reported in the US.

The turnaround in fortunes is particularly dramatic because economic instability had become rare in continental Europe. Until last year the eurozone had never reported a quarterly contraction in GDP growth.

But economists expect the eurozone economy to contract by as much as 2 per cent this year – making the recession one of the worst in continental Europe since the second world war.

Economic gloom is spread across the region but Germany has been especially badly hit by the collapse in global demand. Europe’s largest economy contracted by a much larger-than-expected 2.1 per cent in the fourth quarter, the sharpest fall since the country was reunified in 1990.

Recent confidence indicators, such as the Munich-based Ifo’s business confidence survey, have suggested the worst point of Germany’s recession is over. Still, economists expect Germany’s economy to contract by a further 2 per cent or more this year – which would make it by far the worst year in the country’s post-second world war economic history.

France, meanwhile, reported a 1.2 per cent contraction in fourth quarter – but is still not in a technical recession, defined as two consecutive quarters of negative growth. Italian GDP, however, fell for the third successive quarter, plummeting by 1.8 per cent in the final three months of last year. Portugal was also among the worst performers, reporting a 2 per cent drop. Spanish data, released on Thursday, had shown a 1 per cent fall.

Although eurozone countries such as Spain and Ireland have been hit by collapses in housing markets, the eurozone as a whole has been cushioned from such factors, and its financial sector is relatively unimportant.

But German exports, which had previous powered growth, have been badly affected by the slump in global demand since September’s collapse in Lehman Brothers investment bank.

Germany and the eurozone had already fallen into recession before the impact of the Lehman Brothers collapse had been felt. Eurozone GDP contracted by 0.2 per cent in both the second and third quarters of last year as a result of then-high oil prices, higher interest rates and the global economic slowdown that was already underway.

Eurozone Contracts at Record Rate