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Eurozone Economy Contracts For First Time Since 2009

Eurozone Economy Contracts For First Time Since 2009
2/15/2012 6:37 AM ET

The Eurozone economy shrank for the first time since 2009 as escalating debt crisis and austerity measures dampened economic activity.

Gross domestic product fell 0.3 percent sequentially in the fourth quarter, after expanding by 0.1 percent in the third quarter and 0.2 percent in the second quarter, flash estimates published by Eurostat revealed Wednesday.

The decline was the first since the second quarter of 2009. Another quarter of contraction would take the economy into a technical recession.

Nonetheless, the fourth quarter slump was smaller than the 0.4 percent drop forecast by economists, with the upside surprise coming about due to an unexpected growth reported by France and a smaller-than-expected GDP decline for Germany.

On a yearly comparison, Eurozone GDP growth slowed to 0.7 percent, in line with expectations, from the 1.3 percent reported in the third quarter of 2011. Over the whole year 2011, GDP increased by 1.5 percent in the euro area and by 1.6 percent in the EU27.

The fourth quarter's modest contraction, coupled with the recent improvement in some of the leading indicators, may raise hopes that the economy will expand again in the first quarter and hence avoid a technical recession, Jennifer McKeown, senior European economist at Capital Economics observed.

However, given the enormous challenges in the region, the economist said the bloc will shrink around 1 percent in 2012 and a worse 2.5 percent next year.

The Eurozone will start growing gradually again during the second half of 2012, assuming some easing in sovereign debt tensions, reduced inflation boosting consumer spending power, and a pick-up in global growth, said IHS Global Insight's Chief European Economist Howard Archer. The economist estimates about 0.6 percent fall in overall GDP this year.

Germany, the largest Eurozone economy, contracted by a less than expected 0.2 percent in the fourth quarter, while France reported an unexpected 0.2 percent expansion.

Tight fiscal policy and rising unemployment took its toll on southern peripheral economies. Italy slipped into recession, with GDP logging a 0.7 percent decline after easing 0.2 percent in the third quarter.

Spain shrank 0.3 percent sequentially in the fourth quarter after the economy suffered a stagnation in the third quarter.

Austrian GDP edged down 0.1 percent from a quarter ago. At the same time, the Dutch economy entered recession, where GDP was down 0.7 percent.

Recession deepened in both Portugal and Greece. Greece GDP plunged 7 percent year-on-year in the fourth quarter. Sequentially, Portugal GDP dipped 1.3 percent.

The EU27 logged a 0.3 percent fall, offsetting the third quarter's 0.3 percent growth. The annual rate of growth came in at 0.9 percent, weaker-than the 1.4 percent increase posted a quarter ago.

Yesterday, Moody's cut its ratings on six Eurozone countries, mainly citing the uncertainty over the euro area's prospects for institutional reform. Also, the agency lowered the outlook on the 'AAA' ratings of U.K., France and Austria to 'negative'.

Most of the Eurozone economies excluding Germany underwent downward revisions over the last three months. In January, S&P downgraded nine Eurozone nations, while Fitch lowered the ratings on five euro members.

by RTT Staff Writer

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