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Eurozone Shrinks At Record Pace; Annual Inflation At Historic Low


Euro area witnessed its biggest economic contraction since the records began in 1995. Annual inflation stood at historic low, as price pressures stay tilted to the downside amid slowing economic activity.

Friday, flash estimate released by Eurostat, the Statistical Office of the European Communities said the euro area GDP declined 2.5% sequentially in the first quarter of 2009 compared to a 1.6% decline in the fourth quarter. Economists were looking for a 2% fall in the first quarter. The first quarter decline was the largest since 1995.

GDP contracted a seasonally adjusted 4.6% compared with the first quarter of 2008, much larger than the 1.4% decrease seen in the last quarter of 2008. The decline was steeper than the expected drop of 4.1%.

The recession in Eurozone was severe than in the U.S., where the GDP was down 1.6% sequentially in the first quarter, following a 1.6% fall in the fourth quarter of previous year.

The EU 27 shrank 2.5% sequentially, taking the annual contraction to 4.4% in the first quarter of 2009.

The quarterly national accounts report released by other Eurozone nations also pointed towards a deepening recession.

The largest Eurozone economy showed the biggest contraction since records began in 1970. German GDP dropped 3.8% quarter-on-quarter in the first three months of the year after falling a revised 2.2% in the fourth quarter. The economy extended its contraction that begun in the second quarter of 2008.

The French economy shrank for the fourth quarter in a row on plunging global demand. After easing 1.5% in the fourth quarter of last year, the economy contracted 1.2% in the first quarter.

In the latest quarter, Spanish gross domestic product fell 1.8% versus a 1% decline in the fourth quarter. The first quarter decrease was the worst since the records began in 1970. Spain had entered recession in the fourth quarter of 2008.

The Italian also economy also fell deeper into recession in the first quarter, with gross domestic product, or GDP, falling 2.4% from the previous quarter. That was the biggest decline since the series began in 1980.

The European Commission sharply lowered the GDP outlook for the euro area in its Spring Forecast. The 16-nation euro area is now expected to contract 4% in 2009 and 0.1% next year. The Brussels-based commission also projected a 4% contraction in European Union's GDP this year, making it the worst recession in the EU since World War II.

Commerzbank's analyst, Christoph Weil expects the worst to be over now. Weil forecasts that the contraction in the second quarter will be smaller and expects the economy to stop falling in the latter half of the year. Supporting his assessment, Weil said sentiment indicators turned the corner, signaling that the speed of fall is slowing. Further, monetary and financial policies would take effect by the second half. However, on average for 2009, the economy will still be left with a 4.5% decline, the heaviest fall by Eurozone economies in post-war history.

Today, the statistical office confirmed a 0.6% annual inflation in the euro area in April, the same rate as in March. This was the lowest rate since the launch of euro ten years ago. Monthly inflation was 0.4%. Meanwhile, core inflation rose to 1.8% from 1.4% in March.

The components that had an upward pressure on inflation were alcohol and tobacco, hotel and restaurants. On the other hand, the lowest annual rates were observed for transport and communications, clothing and education.

Commenting on consumer price inflation, Dresdner Kleinwort's Rainer Guntermann said the increase in core inflation does not indicate trend reversal. Economist said headline inflation looks to set to reach new lows by next month. Although, oil prices point to a certain rise in headline inflation in the latter part of the year, the fundamental price pressures remain tilted to the downside in the foreseeable future.

The Monthly Bulletin from the ECB released yesterday revealed that the Governing Council expects headline inflation to decline further in the months ahead and temporarily reaching negative levels around mid-year. But, such short term movements are not relevant from a monetary policy perspective.

Last week, the European Central Bank had reduced its benchmark interest rate to a new low as the 16-nation economy faces its worst recession since World War II. The Governing Council of the ECB cut the interest rate on the main refinancing operations of the Eurosystem by 25 basis points to 1.00%.

At a press conference accompanying the decision, ECB President Jean-Claude Trichet said the central bank plans to buy euro-denominated covered bonds.

Guntermann is of the view that monetary policy seems poised to remain expansionary for quite while.

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