Eurozone recession deepened at end of 2012

Weak German exports hit growth in the final three months of 2012

The eurozone recession deepened in the final three months of 2012, official figures show.

The economy of the 17 nations in the euro shrank by 0.6% in the fourth quarter, which was worse than forecast.

It is the sharpest contraction since the beginning of 2009 and marks the first time the region failed to grow in any quarter during a calendar year.

It followed news that the economies of Germany, France and Italy had all shrunk by more than expected.

A recession is usually defined as two consecutive quarters of contraction. In the first three months of 2012 the eurozone economy failed to grow, but then in the second quarter of the year it contracted by 0.2% and it shrank by 0.1% in the third quarter.

The GDP numbers sent the euro lower. It fell to a three-week low against the US dollar of $1.3320.

Carsten Brzeski from ING said: "These are horrible numbers, it's a widespread contraction, which does not match this positive picture of stabilisation and positive contagion."

But he added: "We still expect growth to return in the course of 2013 but any return of growth will be very small which means that the social impact of this recession, especially in the peripheral countries will be still a very severe one."

Germany, the eurozone's biggest economy, saw the deepest contraction since the height of the financial crisis as its economy shrank 0.6%.

It was hit by a sharp decline in exports.

The German statistics office said: "Comparatively weak foreign trade was the decisive factor for the decline in the economic performance at the end of the year: in the final quarter of 2012 exports of goods declined significantly more than imports of goods."

The French economy shrank by 0.3% in the fourth quarter, while Italy showed 0.9% contraction for the period.

'Outlook promising'

There are diverging views on the prospects for the different countries in the region.

Economists remain upbeat about the outlook for Germany.

"This is a temporary period of weakness in the German economy rather than the beginning of a long period of stagnation or even a recession " said Andreas Rees, chief German economist at the bank Unicredit.

He added: "The outlook is very promising. The chances that the economy will return to growth at the beginning of this year are very good."

That sentiment has been backed up by recent surveys. January's closely watched business confidence survey for Germany hit its highest level since before the eurozone crisis.

Eurozone purchasing managers' index (PMI) surveys for January also indicated the worst may be over. Germany, Spain and Italy all showed signs of stabilisation - although in France the downturn deepened.

That is part of the reason why many analysts have predicted that France is heading for a recession.

However, France's central bank recently forecast that the economy would just manage to grow in the first three months of 2013.

Growth rethink

The latest GDP number means that the French economy barely grew at all 2012. Eurozone sees recession deepen

French Finance Minister Pierre Moscovici admitted on French radio that the government may need to rethink its growth forecast of 0.8% for 2013.

"We note that the figure for 2012 is not good, around zero, and so we also know that growth for 2013 will have to be re-thought."

He added that he did not want to "condemn the country to recession" by adding "austerity to the difficulties of today".

French President Francois Hollande is trying to make France more competitive by slashing government spending and relaxing labour regulations.

Italy has been in recession since mid-2011. Prime Minister Mario Monti has introduced severe austerity measures to cut its debt and reassure markets that it is a safe country to lend to. An election is due on 24 February.

Euro strength

The recent strength of the euro has been a source of concern for France in particular. France has called for a target to be set to stop the single currency from becoming so strong that it damages the recovery. A high valuation makes exports more expensive.

This has led to renewed talk of "currency wars" - where countries compete to devalue their currencies to help boost exports.

Policymakers have warned against raising those tensions.

"We have to be cautious in my view not to build up the rhetoric about currency wars, because if we build up the rhetoric, the danger is there that something worse can happen" said the European Central Bank's Vice President Vitor Constancio at an event in Brussels.