Eurozone economy shrinks more than expected
The recession across the economy of the 17 European Union countries that use the euro deepened in the last three months of 2012 as Germany faltered in the face of anemic demand across the debt-ridden region.
Eurostat, the EU's statistics office, said Thursday the eurozone economy shrank by 0.6 per cent in the final quarter of 2012 from the previous three-month period. The decline was bigger than the 0.4 per cent drop expected in markets and represented the biggest fall since the first quarter of 2009 when the global economy was in its deepest recession since World War II.
The eurozone has now contracted for three straight quarters – a recession is officially defined as two quarters of negative growth. It's not alone in struggling to post growth – figures earlier showed Japan in recession, too, and the U.S. economy has shown signs of weakness, with its economy flat in the final quarter of 2012, according to Eurostat.
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 per cent in the fourth quarter as demand for its exports fell. France, Europe's second-biggest economy, also saw output drop by 0.3 per cent. 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.
Hitting a low point
There are hopes, though, that the fourth quarter of 2012 will mark the low point for the eurozone, and Germany in particular. In the first few weeks of 2013, there have been some indications that the eurozone may be over the worst as the financial markets have become less febrile with regard to 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 don't exist to the same extent in Germany. The French government has to keep a tight leash on its finances, unemployment is around 10 per cent 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.
"Unfortunately, their positive impact on competitiveness, employment and activity will take time to materialize and will do little to mitigate economic pain in the short term," said Herve Goulletquer, an analyst at Credit Agricole CIB.
Alongside the debt reduction efforts that governments are pursuing across the eurozone, 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.
Thursday's downbeat figures offered some respite though, as the euro fell sharply against a broad range of currencies. The currency was 0.9 per cent lower at $1.3325 and down 1 per cent at 124.07 yen.