Eurozone economy shrinks 0.3 per cent in fourth quarter

The eurozone economy shrunk by 0.3 per cent in the last three months of 2011, official figures showed yesterday in a clear sign the debt crisis is pushing the 17-nation bloc towards recession.

The eurozone posted growth of 1.5 per cent overall in 2011 but went into reverse in the fourth quarter after expanding by 0.1 per cent in the third, according to Eurostat data agency.

It was the first time the eurozone contracted since the second quarter of 2009.

“The overall contraction in activity reflects the combination of uncertainty and financial stress related to the escalation of the eurozone crisis at the end of last year,” said Nick Kounis, analyst at ABN AMRO.

While confidence indicators turned higher at the start of the year and market conditions improved, the austerity measures adopted across the eurozone are “likely to remain a major drag on economic growth,” he said.

“We expect the economy to remain weak in the coming months, though recent data indicate that the downturn is unlikely to be deep or long.”

The Eurostat figures are better than expected as analysts polled by Dow Jones Newswires forecast a fourth quarter contraction of 0.4 per cent and growth of just 0.7 per cent overall in 2011.

Germany, Europe’s top economy, posted a contraction of 0.2 per cent in the fourth quarter while its second-placed partner France surprised with growth of 0.2 per cent, the figures showed. In Austria, too, the economy contracted slightly in the period from October to December as weak global demand hit exports and consumption at home fell. Fourth quarter GDP figures for Malta are not yet available.

Italy, the Netherlands and Belgium, meanwhile, entered recession after their economies shrunk in the third and fourth quarters. Recession is defined as two consecutive quarters of economic contraction.

The Italian economy shrunk by 0.2 per cent in the third quarter and 0.7 per cent in the fourth, with the Dutch economy contracting 0.4 per cent and 0.7 per cent and Belgium down 0.1 per cent and 0.2 per cent.

Spain stagnated in the third and fell 0.3 per cent in the last three months of 2011. The Portuguese economy contracted in each quarter of 2011, shrinking by 1.3 per cent in the final three months.

Figures for Greece were not available but Athens announced Tuesday that its economy shrunk by seven per cent in the fourth quarter compared to the same period in 2010.

The GDP of the wider, 27-nation European Union, which includes Britain, also contracted by 0.3 per cent in the fourth quarter but grew by 1.6 per cent overall in 2011.

The British economy shrunk by 0.2 per cent in the fourth quarter after growth of 0.6 per cent in the third.

On a 12-month comparison, the eurozone’s seasonally adjusted gross domestic product increased by 0.7 per cent in the fourth quarter compared to the same period in 2010.

Like France, Hungary and Bulgaria also saw their economies expand in the fourth quarter. Hungary’s economy grew by 0.3 per cent, down from 0.4 per cent in the preceding three months and in Bulgaria, growth accelerated slightly to 0.4 per cent.

Analysts predicted that Germany’s slowdown will be short-lived. The dip in GDP was “not as deep as expected, confirming that the German economy only took a growth pause and is not approaching a new recession,” said Carsten Brzeski, economist at ING Belgium.

“Of course, a quick rebound is not (automatic) and the big unknown for the German economy remains the sovereign debt crisis. One thing, however, is obvious – today’s numbers are no reason at all to start singing swan songs on the German economy,” Brzeski said.

Among the factors pointing to an early return to growth was the low risk of a credit crunch, the analyst argued. Contrary to many European peers, German banks have not tightened lending conditions, at least for now, he said.

Many of Germany’s most important trading partners are outside the eurozone so exports could benefit from a pick-up elsewhere even if Europe slips into recession.

Furthermore, a sound labour market would ensure that domestic demand, which has actually taken over from exports as the main driver of growth, would remain strong, the analyst said.

Annalisa Piazza at Newedge Strategy believed the European fourth-quarter GDP data were “a touch less gloomy than expected.”

It was “the first contraction in activity since early 2009 and – in our view – just a one-off event,” the analyst said, predicting a “modest improvement already in the first half.”

The “solid structure of the economy is acting as a cushion to external shocks and there are no major risks of a deep recession,” she said.