Single currency crisis spreads northwards affecting EU's core economies of Germany and France
A deepening recession in the 17-nation eurozone sent shares lower on Thursday amid evidence that the problems of the single currency's crisis-hit periphery were spreading northwards to affect monetary union's core economies of Germany and France.
Despite an easing of financial tensions in the second half of the year, gross domestic product in the members of the monetary union dropped by 0.6% in the final three months of 2012, a heftier decline than the markets had been expecting.
An across-the-board fall in output that affected both large and small economies meant that the eurozone economy failed to register an increase in activity in a single quarter of 2012, with a flat first three months of the year followed by three successive drops in output. The combination of weakening activity and high budget deficits prompted a warning from the credit rating agency Standard & Poor that Spain, France, Italy and Portugal were at risk of a downgrade in 2013.
Although Britain also registered a fall in output in the final three of 2013 and is one quarter of contraction away from triple-dip recession, Moritz Kraemer, managing director of European sovereign ratings at S&P said it was not a foregone conclusion that the UK would be stripped of its coveted AAA rating.
Eurostat, the EU's statistics office, said seven eurozone countries – Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Finland – were already officially in recession after suffering two or more successive quarters of falling output.
The euro slid on the foreign exchanges amid news that the two biggest economies of monetary union both ended the year in worse shape than feared. Germany contracted by 0.6%, its worst performance since the global recession was at its most intense in early 2009, while France finally admitted yesterday that it would not meet its budget objectives for 2013 after posting a fall of 0.3% in national output in the three months to December 2012.
Even steeper falls were recorded in those countries where full-blown austerity programmes are in force. The Italian economy shrank by 0.9% in a continuation of a recession that has been under way since the middle of 2011. Portugal reported a 1.8% contraction, Cyprus a 1.0% fall, while Spain had already announced that GDP dropped by 0.7%. Greece said output in the final three months of 2012 was 6% below that of a year earlier, a slightly slower pace of decline than the 6.7% fall in the year to the third quarter. Unemployment rose to 27% of the workforce.
The poor performance of the eurozone's two biggest economies meant the drop in GDP in the fourth quarter was worse than the 0.1% fall in the third quarter. Consensus among analysts polled by Reuters had been for a 0.4% drop.
Germany's main stock market index, the DAX, fell by 1% yesterday, with shares in Paris, Milan and Madrid also losing ground. The euro dropped against the dollar and the yen on the foreign exchanges amid speculation that the European Central Bank will cut interest rates in a response to the fall in output.
The US grew by 2.2% in 2012 and Japan by 1.9%, while GDP in the eurozone contracted by 0.5%.
Charles Dumas, of Lombard Street Research, said: "The eurozone recession in the fourth quarter of 2012 reminds one its long-term growth performance has varied between poor (Germany) and atrocious (Italy). Whereas the US has largely completed the structural adjustments needed to remove pre-2008 imbalances, in Euroland the nature of the monetary union conflicts with what needs to be done.
Jonathan Loynes, chief European economist at Capital Economics, said the figures for the end of 2012 were to an extent "old news", with more recent survey evidence pointing to a pick up in both sentiment and activity. "But for now at least, they are not strong enough to suggest that the eurozone has pulled out of recession."
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