Euro zone contracts for sixth quarter

Germany's economy crept back into growth at the start of the year but not by enough to stop the euro zone from contracting for a sixth straight quarter, and France slid into recession.

Falling output across the region meant the 17-nation economy is in its longest recession since records began in 1995. It shrank 0.2 per cent in the January to March period, the EU’s statistics office Eurostat said, worse than the 0.1 per cent contraction forecast by a Reuters poll.

"The misery continues," said Carsten Brzeski, a senior economist at ING in Brussels. "Almost all core countries bar Germany are in recession and so far nothing has helped in stopping this downward spiral."

As well as France, the economy shrank for the quarter in Finland, Cyprus, Italy, The Netherlands, Portugal and Greece. Data last month showed Spain’s economy contracted for a seventh consecutive quarter.

Germany grew by just 0.1 per cent on the quarter, weaker than expected as a harsh winter prevented a stronger rebound.

“The German economy is only slowly picking up steam,” the Statistics Office said in a statement. “The extreme winter weather played a role in this weak growth.”

France entered a shallow recession after contracting by 0.2 per cent in the first three months of the year, as it did in the last quarter of 2012, the INSEE statistics agency said.

The German statistics office revised down its figure for the end of 2012 to show a contraction of 0.7 per cent, from 0.6 per cent.

The difference between Europe’s two largest economies looks narrow over the first three months of the year but European diplomats and officials fear France will continue to lag far behind, threatening the cohesion of the twin policy motor that has traditionally driven the European project.

“Looking ahead, prospects for the German economy are further clearing up,” ING economist Carsten Brzeski said. “Industry is gaining pace as order books have started to fill again and companies are cautiously stepping up their investment plans. Moreover, domestic demand with the solid labour market and wage increases have become a reliable growth driver.”

Even Germany will find it difficult to reach take-off speed alone.

Thomas Gitzel at VP Bank expected a stronger performance in the second quarter as construction activity, hit by the extreme winter, bounces back.

But he added: “The current global economic backdrop makes a sustained recovery more unlikely. Difficulties in France and disappointing growth figures from China are strewing stones in the path of the Germany economy. Hopes of significantly higher growth could be premature.”

The figures will add fuel to a burgeoning debate about how to balance the need to cut debt with measures to foster growth.

Italian and French leaders have been vocal in calling for an end to austerity and European Commission president Jose Manuel Barroso has said it has reached the limits of public acceptance.

France, Spain and others have been granted longer to meet their deficit targets because of the worsening economic outlook

Germany, however, sees austerity as necessary to bring down bloated debts after a decade of credit-fuelled spending across much of Europe, even if many economists say it has deepened the euro zone’s recession.

Data out last month showed Spain’s economy shrank for a seventh consecutive quarter in the first three months of the year, falling by 0.5 per cent.

The government has acknowledged that 2013 will be worse than it had previously expected with the economy expecting to contract by 1.3 per cent.

Reuters