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Economy in Europe Contracts More Than Expected Economy in Europe Contracts More Than Expected
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FRANKFURT — Economic output in the euro zone shrank more than expected in the fourth quarter of 2012, according to official data published Thursday, as Germany and France were caught up in a slump that was already well underway in countries like Spain and Italy. FRANKFURT — European economies shrank in the fourth quarter at their fastest rate since the global financial crisis hit four years ago, new data showed Thursday, with both strong and weak countries falling short of expectations and raising anxieties about a longer, deeper recession.
The euro zone economy contracted 0.6 percent compared to the previous quarter, the third decline in a row. Except for the second quarter of last year, when growth among the 17 members of the currency union was zero, the euro zone has effectively been in recession since 2011. Germany and France are now caught up in a slump that was already well underway in other big euro zone economies like Spain and Italy.
Among all 27 members of the European Union, including countries like Britain or the Czech Republic that are not part of the euro zone, economic output fell 0.5 percent. Along with news Thursday that the Japanese economy contracted for a third-consecutive quarter, the European figures are a reminder of how hard it has become for many of the world’s most economically developed countries to overcome their debt problems and return to growth. Even the United States, which had been seeming to rebound, surprised economists late last month by reporting contraction for the fourth quarter.
Economists had been expecting the downturn in the euro zone to end soon, but the figures published Thursday may signal that the recovery will take longer than they had thought. The euro fell by nearly a cent against the dollar in early trading Thursday as investors reassessed the prospects for growth. In the euro zone, economic output shrank 0.6 percent from October through December, compared with the previous quarter, according to official figures published Thursday. That followed a decline of 0.1 percent in the third quarter.
“While we expect a stabilization in the first quarter and a weak recovery from the second quarter onwards, one has to acknowledge that a lot of things still can go wrong,” Peter Vanden Houte, an economist at ING Bank, said in a note to clients. While economists had expected a decline in the fourth quarter, they did not expect it to be quite so big. The disappointing data call into question the timing of a recovery that was supposed to begin later this year. And the figures put pressure on government budgets that are already stretched, because tax revenue automatically falls if companies and workers are earning less.
Total output in the euro zone remains 3 percent below its level in 2008, when the financial crisis began, Mr. Vanden Houte said. Almost every one of the euro zone’s 17 members suffered a drop in output, measured as gross domestic product. In the three biggest euro economies, G.D.P. fell 0.6 percent in Germany, 0.3 percent in France and 0.9 percent in Italy.
Hopes for a quick recovery had been raised by an increase in euro zone industrial production during December. That data, along with surveys of business sentiment, suggested that economic activity was picking up as businesses and consumers became less afraid that the euro zone will break up under the stress of its debt and banking crisis. Total output in the euro zone remains 3 percent below its level in 2008, when the financial crisis began, according to calculations by ING Bank.
A decline for the bloc as a whole during the fourth quarter was inevitable after its two largest economies contracted. Data published earlier Thursday showed that the German economy declined 0.6 percent during the last quarter of 2012, the most in three years. German exports fell and companies invested less in new equipment, according to official figures. For France, especially, Thursday’s new data were a deep embarrassment to the government. The Socialist president, François Hollande, was elected last May after pledging to reduce the budget deficit this year to 3 percent of G.D.P., as required under euro zone rules. And his finance minister, Pierre Moscovici, had promised numerous times since then that the government would meet the 3 percent limit this year. But now, the lack of growth will make it all but impossible to meet that target.
The French economy, the second largest in the euro zone, fell 0.3 percent in the fourth quarter, as major employers like carmaker PSA Peugeot Citroën suffered from plunging demand in important markets like Spain and Italy. The gloomy economic data could also influence the outcome of elections later this month in Italy, where the country’s international credibility is at stake. The prolonged slump provides ammunition to populist forces led by former Prime Minister Silvio Berlusconi, perhaps giving his party enough seats in Parliament to block unpopular measures designed to improve the country’s economic performance.
Meanwhile, the recession in Italy deepened as output fell 0.9 percent, also more than expected. Italian consumers are too uncertain about the future to spend, while big employers like automaker Fiat are suffering from slack domestic and foreign demand. The economic report Thursday by Eurostat, the European Union’s statistics agency, was not bad enough to kill all hope that the euro zone was on the mend and could yet see weak growth later in the year.
Germany had continued to defy the recession in the euro zone as a whole during the first nine months of last year, benefiting from exports to countries outside the euro zone. The decline in the fourth quarter was an illustration of Germany’s vulnerability to the fortunes of its neighbors. And it was bad news for Europe as whole, because the relatively strong German economy had been compensating for weakness in France and other countries. Industrial production for the bloc rose in December, and surveys have suggested that businesses and consumers were becoming more willing to spend, because they were less afraid that the euro zone would break up under the stress of debt and banking crisis.
“Not only the ‘usual suspects’ Spain and Italy showed negative growth, but also Germany, France and the Netherlands,” Mr. Vanden Houte said. “The outlook for 2013 remains subdued.” “I think the euro zone looks a lot more stable,” said Marie Diron, an economist in London who advises the consulting firm Ernst & Young. “There are surely companies in Germany and Finland which couldn’t really take the investment and equipment decisions they wanted to,” because of fears of a breakup. “Now that has disappeared.”
But Ms. Diron noted that unemployment remained high in many countries, creating political instability that was amplified by governments’ need to cut spending. “That’s really where the risk remains,” she said.
The deepest misery is still in Greece, even if fewer people are predicting that the country will have to leave the European Union. Unemployment rose to a record 27 percent in November, the Greek Statistics Agency said Thursday. Nearly two-thirds of young people are jobless.
The French economy has been suffering from a drop in industrial production, as major employers like the carmaker PSA Peugeot Citroën struggle to cope with plunging demand in their most important markets, including Spain, where growth last quarter fell 0.7 percent.
Earlier this week, the French government auditors, the Cour des Comptes, announced that French growth would be significantly below the 0.8 percent previously estimated by the Hollande government, making it practically impossible to keep the deficit below the target of 3 percent of G.D.P., despite significant tax increases. The figures Thursday, showing a contraction of 0.3 percent in the fourth quarter and no growth at all in 2012, were even worse than expected.
The auditors recommended balancing the tax increases with more cuts in public spending, but the Hollande government has said that it wants to impose taxes up front and deal with more significant spending cuts in coming years. Some economists contend that France is taxing itself into a recession.
Mr. Hollande, who has argued for measures to promote economic growth as unemployment rises, admitted failure, telling reporters earlier this week, “There is no point sticking to objectives if they are not going to be achieved.”
Mr. Moscovici said after a cabinet meeting Wednesday that the government did not want “to add austerity on top of austerity, either for France or for Europe.”
Prime Minister Jean-Marc Ayrault also conceded the failure in an interview Wednesday with the television network France 3, but he said the ultimate goal was still a 0 percent deficit in 2017.
The investment bank Barclays estimated that without a supplementary budget, France’s deficit would be 3.3 percent of G.D.P. this year.
Among all 27 members of the European Union, including countries like Britain and the Czech Republic that are not part of the euro currency union, economic output fell 0.5 percent.
The euro fell by nearly a cent Thursday, to about $1.33, as investors reassessed the prospects for growth.
In Germany, the unexpectedly large decline in output was caused by lower exports and fewer purchases of equipment by companies.
During the first nine months of last year, Germany had continued to defy the recession in the euro zone as a whole, benefiting from sales to countries outside the euro zone, especially the United States and China. But the decline in the fourth quarter was an illustration of Germany’s vulnerability to the fortunes of its neighbors.
Opel, the European unit of General Motors, is an example. It sells most of its cars within Europe, and has been racking up ever larger losses. On Thursday G.M. said that it lost $1.8 billion in Europe during 2012, more than double its loss the previous year.
In coming weeks, economists will be watching for evidence that the German economy has already begun growing again, as many predict. If so, that could help pull the rest of Europe out of recession.
“While we expect a stabilization in the first quarter and a weak recovery from the second quarter onwards,” Peter Vanden Houte, an economist at ING Bank, said in a note to clients, “one has to acknowledge that a lot of things still can go wrong.”
Steven Erlanger contributed reporting from Paris.