Euro zone recession deepens as Germany falters

Thursday 14 February 2013 16.49
Euro zone economy shrank by 0.6% in last quarter of 2012
Euro zone economy shrank by 0.6% in last quarter of 2012

The recession across the euro zone economy deepened in the last three months of 2012 as Germany faltered in the face of weak demand across the debt-ridden region.

Eurostat, the EU's statistics office, said today that the euro zone economy shrank by 0.6% in the three months from October to December from the previous three-month period.

The decline was bigger than the 0.4% drop expected in markets.

It represented the biggest fall since the first quarter of 2009 when the global economy was in its deepest recession since World War II.

The euro zone has now contracted for three quarters in a row - a recession is officially defined as two quarters of negative growth.

But it is not alone in struggling to post growth - figures earlier showed Japan in recession, too, and the US economy has shown signs of weakness, with its economy flat in the final quarter of 2012.

The worry for European policymakers is that output is declining not just in the weaker, debt-laden economies such as Greece and Spain, where governments have been aggressively increasing taxes and cutting spending.

Germany, Europe's biggest economy, shrank by a quarterly rate of 0.6% in the fourth quarter as demand for its exports fell. France, Europe's second-biggest economy, also saw output drop by 0.3%. Both economies are now one quarter away from recession.

In total, the Eurostat figures show that seven euro countries are in recession - Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Finland.

There are hopes, though, that the fourth quarter of 2012 will mark the low point for the euro zone, and Germany in particular. In the first few weeks of 2013, there have been some indications that the euro zone may be over the worst as the financial markets have become less worried about the region's debt woes.

ING economist Carsten Brzeski said the German figures were disappointing but that there was "no reason to start singing the blues on the German economy."

He noted improving confidence indicators and rising factory orders and industrial production. "There is increasing evidence that the economy should pick up speed again very quickly," he said.

France, however, appears to be a greater cause for concern as its economy faces a number of headwinds that do not exist to the same extent in Germany. The French government has to keep a tight leash on its finances, unemployment is around 10% and its exporters are struggling, not least in the auto sector, with both Peugeot-Citroen and Renault struggling.

Though many analysts think France's recent structural reforms will help make the economy more competitive, any tangible gains will not be seen for a while.

Along with the debt reduction efforts that governments are pursuing across the euro zone, the region's exporters are also having to contend with a currency that has been rallying on foreign exchange markets, potentially making their products less competitive in the international marketplace.

Today's downbeat figures offered some respite though, as the euro fell sharply against a broad range of currencies.