Euro zone plunges deeper into recession

The euro zone retreated deeper into recession in the final quarter of last year and economists predict little or no growth until 2014.

Analysts were braced for a decline in growth across the single-currency zone, but GDP fell by 0.6 per cent during the fourth quarter, not only worse than expected but also the weakest reading since the depths of the financial crisis in March 2009.

The shock waves could also be felt by regional economies, economists warned yesterday.

"Continued weakness in euro-zone growth is significant for North African economies such as Morocco, Tunisia and Egypt, which have very strong linkages with continental Europe," said Raza Agha, the chief economist for the Middle East and Africa at VTB Capital. "The external sectors in all of these countries are extremely dependent on what happens in Europe at the moment."

Forecasters pointed to "a further deterioration in economic activity and labour markets in the euro area", the European Central Bank (ECB) said in its latest survey, which cut inflation estimates to 1.8 per cent for the next two years.

"Real GDP growth expectations were also revised downwards and unemployment expectations were revised upwards for 2013 and 2014." Germany's economy fell 0.6 per cent during the fourth quarter as industrial production faltered and a strong euro hampered exporters, paring expansion during the first three quarters of the year.

The decline was mainly because of the "comparably weak German foreign trade", the country's statistics office said.

France's economy contracted 0.3 per cent during the same period for the first time since the second quarter of last year after briefly exiting recession during the autumn.

Meanwhile, Italian GDP declined 0.9 per cent, the country's sixth consecutive quarter of declines.

The data release "provides a pretty bleak picture of the state of the euro-zone economy at the end of last year", analysts from Capital Economics wrote in a research report.

"Survey indicators have pointed to an improvement in the early months of this year. But for now at least they are not strong enough to suggest that the euro zone has pulled out of recession."

The poor results in the survey from the currency bloc came after Japan released figures showing its economy also unexpectedly shrank during the fourth quarter, giving the country's new government scope to press ahead with bond-buying plans.

Although concerns about the public finances of Italy and Spain have receded following the ECB's announcement in September that it was ready to deploy its unlimited financial firepower to keep the euro zone intact, the euro has risen sharply since then.

The currency has advanced 10.2 per cent against the US dollar since bottoming out last July, weighing down European exporters including Germany, which has until now been able to avoid a contraction of its economy.

European equity markets slid on the news, with the Stoxx 600 index falling 0.6 per cent to 286.89 in midday trading.

But the euro took a beating against other reserve currencies, falling more than 1.1 per cent against the US dollar and sliding 1.29 per cent against the Japanese yen.

The British pound also lost strength yesterday, falling to an eight-month low of US$1.5498.

ghunter@thenational.ae