Debt woes push Europe economies into reverse (Business)

By Simon Morgan, The China Post, February 16, 2012, http://www.chinapost.com.tw/business/europe/2012/02/16/331805/Debt-woes.htm

FRANKFURT -- The sovereign debt crisis brought economic growth all across Europe to a standstill and even pushed a number of countries into recession at the end of last year, data showed on Wednesday.

Both the 27-nation EU and the 17-member eurozone saw their economies contract by 0.3 percent in the fourth quarter of 2011, according to a flash estimate by the Eurostat data agency.

Germany, the region's biggest economy, saw its gross domestic product (GDP) shrink by 0.2 percent in the period from October to December as the long-running debt crisis slammed exports, its traditional engine of growth.

Similarly, activity in Austria, Britain, Estonia, Lithuania, Romania and Spain ground to a halt, while Belgium, Italy, the Netherlands and Portugal all found themselves in recession, technically defined as two consecutive quarters of GDP contraction.

Among the countries to publish preliminary fourth-quarter GDP data so far, only Bulgaria, France, Hungary, Latvia and Slovakia saw their economies expand, while zero growth was recorded in Cyprus and Finland.

France, the euro area's second-biggest economy, provided the main positive surprise, notching up modest growth of 0.2 percent in the final quarter of last year.

Analysts said that at first glance the data did not appear to be as dire as expected and, on the basis of the figures released so far, the contraction of the eurozone economy as a whole was not as deep as feared.

“Coupled with the recent improvement in some of the leading indicators, (the data) may raise hopes that the region will expand again in the first quarter and hence avoid a technical recession,” said Jonathan Loynes, chief European economist at Capital Economics in London.

But there were also reasons to be cautious, he warned.

“For a start, what details of the breakdown of growth we have at this stage are not particularly encouraging. Much of the upside surprise on French GDP came from a drop in imports, while consumer spending and net trade were both negative in Germany,” he said.

“And more generally, with Greece still on the edge of disaster and the fiscal crisis deepening, the eurozone economy faces enormous challenges in 2012.”

Annalise Piazza at Newedge Strategy said the dip in area-wide GDP had been expected “as the negative effects of the debt crisis have filtered on to the real economy.

“However, recent surveys showed signs of bottoming out in early 2012. Activity remains close to very weak levels but the economy doesn't seem to be on a free-fall,” she said.

Howard Archer, chief European economist at IHS Global Insight, was not so optimistic.

The eurozone had “one foot back through the recession door in the fourth quarter of 2011,” with the data for struggling southern periphery eurozone economies making for “largely grim reading,” he said.

“Despite some recent improved eurozone surveys and evidence that Germany is returning to growth, we doubt that the eurozone will be able to avoid further contraction in the first quarter and very possibly the second as well,” Archer said.

He predicted the euro area would “start growing gradually again during the second half of 2012 but would show an overall contraction of 0.6 percent across the whole year.

That means the European Central Bank may have to cut key interest rates from their current historically low level of 1 percent soon, Archer said.

Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast agreed that there was “little good news” in the GDP data.

“The current weak economic conditions also highlight the need for the ECB to keep providing ample support to the banking sector in the form of liquidity provision and to the real economy in the form of interest rate cuts,” she said.

Commerzbank economist Christoph Weil predicted that the euro area will contract against in the first quarter of 2012.

“But then the worst should be over and activity could start picking up in the spring as long as the sovereign debt crisis remains under control,” he said.