Nicholas Winning
Article from: Dow Jones Newswires

THE Eurozone plunged deeper into recession than expected in the fourth quarter, leaving economists wondering if the sharpest contraction in the currency bloc's history will spill into 2009.

The European Union's Eurostat reported that euro-zone GDP contracted 1.5 per cent on the quarter and was 1.2 per cent weaker than in the fourth quarter of 2007. That marked the biggest drops in both measures shown in Eurostat records calculated back to 1995. In the third quarter, GDP shrank 0.2 per cent on the quarter, but grew 0.6 per cent on the year.

The severity of the downturn, led by the biggest quarterly fall in German GDP for more than two decades, suggests the European Central Bank will cut interest rates to an all-time low next month.
France and Italy also reported sharp downturns as the global financial crisis throttled demand and output at home and in the region's main trading partners.

The Eurozone quarterly GDP contraction was larger than the market consensus estimate of a 1.3 per cent drop from a Dow Jones Newswires survey of economists last week.

European shares were higher and there was little reaction on currency and bond markets where traders were braced for numbers that would cement the case for the ECB to continue the monetary easing drive which has seen rates fall to 2.0 per cent from 4.25 per cent in October.

"We expect a 50-basis-point move at the next meeting and a further cumulative 50-basis-point easing throughout the second quarter," Aurelio Maccario, the chief euro-zone economist at UniCredit Group, said. "Chances that the ECB will go below 1 per cent aren't negligible, but it won't be easy to get there."

Eurostat didn't give a breakdown of the preliminary figures. Economists said GDP was hit by weaker net exports, particularly in regional powerhouse Germany, coupled with a significant inventory correction and a sharp fall in investment.

"The message is you are going to get a very large contraction again in the first quarter and further contraction probably in the second quarter,” said Julian Callow, chief European economist at Barclays Capital. “We're just not really seeing any major upswing in business confidence so far.”

Although recent surveys suggest the pace of GDP contraction could moderate in coming quarters, economists now say that a recovery appears a long way off.

"We expect a further sharp deterioration in the year-on-year rate. We forecast that it will bottom out at minus 3.3 per cent in Q3 this year. The risk is to the downside," BNP Paribas economist Ken Wattret said in a note.

Over the whole of 2008, GDP grew 0.7 per cent in the euro area, Eurostat said. GDP grew 2.6 per cent in 2007.

Amelia Torres, the European Commission's spokeswoman for economic issues, said: "We were expecting negative figures for the fourth quarter and still negative figures for the first quarter."

The Eurozone entered recession for the first time in the third quarter. Since then, business and consumer confidence has dropped to all-time lows, industrial output has fallen at a record pace, unemployment has risen to a two-year high, and demand in many of the Eurozone's main trading partners has weakened.

The Eurozone's fourth quarter GDP downturn was deeper than the 1 per cent drop seen in the US, but matched the fall in the UK economy. Japan, which is also in recession, is expected to post its sharpest annualised contraction for more than three decades.

Figures released earlier by individual member states showed German real GDP slumped 2.1 per cent in the final three months of the year due to weaker exports and machinery investment - the third consecutive quarterly drop and sharpest contraction since 1987.

In Italy, GDP shrank 1.8 per cent in the fourth quarter, the sharpest decline since 1980. In France, the Eurozone's second-biggest economy, the finance ministry said GDP contracted 1.2 per cent on the quarter - and should contract by at least 1.0 per cent this year on average.

"This Friday the 13th is living up to its name. Eurostat has just released 'scary' GDP numbers," Martin van Vliet, a senior euro-zone economist at ING, said in a note.

"Our base case is for Eurozone real GDP to drop by 2.3 per cent this year as a whole, with the balance of risks skewed to an even weaker outcome."