THE EURO zone economy contracted less than feared at the end of last year after an unexpectedly robust performance by France partly offset chronic weakness across much of crisis-hit southern Europe.
Euro zone gross domestic product contracted by 0.3 per cent in the fourth quarter compared with the previous three months, highlighting the impact on the real economy of the region’s escalating debt crisis.
Italian GDP fell 0.7 per cent, plunging the country into recession – defined as two consecutive quarters of contraction. On Tuesday, Greece and Portugal also reported sharp slowdowns in late 2011.
Euro zone policymakers will be relieved, however, by the surprise expansion of 0.2 per cent in French GDP over the same period, boosted by exports. Germany, meanwhile, reported a smaller than expected 0.2 per cent contraction.
The data increased the likelihood of “core” Europe escaping a deep recession, with “the balance of risk – for France and the euro area in aggregate – oscillating between shallow recession and subdued growth”, said Gilles Moec, European economist at Deutsche Bank.
“This would be a much better configuration than a few months ago when the data were replicating the slopes seen in 2008/09.”
Recent survey data have led the European Central Bank to spot signs of “stabilisation” across the euro zone, and Germany’s economy may already be rebounding.
The Mannheim-based ZEW economic institute reported on Tuesday that its gauge of German investor sentiment – used to predict economic turning points – had turned positive for the first time since May last year.
Financial market sentiment has been helped by the ECB’s injection in December of €489 billion in three-year loans into the euro zone banking system.
However, the uncertainties created by the euro zone debt crisis and the risk of Greece defaulting or leaving the 17-country monetary union continue to pose substantial economic risks.
Any rebound in the first weeks of this year would have been hit by the recent exceptionally bitter weather, which caused widespread economic disruption.
Moreover, southern European economies remain fragile. Last month Spain announced a 0.3 per cent contraction in fourth-quarter GDP.
Italy’s plunge into deep recession highlighted the scale of the challenge facing Mario Monti, the country’s new prime minister.
Luigi Speranza, economist at BNP Paribas said: “Mr Monti has lent credibility to the government’s action on fiscal consolidation and structural reforms, an essential factor underlying the improvement in market sentiment lately.
“The majority that supports the government is, however, inherently fragile. We believe the government will last until spring 2013, but early elections remain a risk.”
The euro zone’s 0.3 per cent fall in GDP in the fourth quarter compared with a 0.2 per cent contraction over the same period in the UK – and a 0.7 per cent expansion in the US economy. – (Copyright The Financial Times Limited 2012)
