Eurozone back in recession, outlook darkens

The eurozone tipped back into recession for the second time in just three years in the third quarter, data showed Thursday, making it even harder to solve the debt crisis eating away at the bloc’s foundations.

The 17-nation eurozone economy shrank 0.1 percent compared with the three months to June when it contracted 0.2 percent, meeting the technical definition of a recession as two consecutive quarters of decline.

The figures made grim reading after massive protests Wednesday across Europe against the austerity measures governments have taken to resolve the debilitating debt crisis but which many believe only undercut growth and make the problem worse.

"The data confirmed that, despite continued growth in Germany and France, the eurozone as a whole is now officially in recession. We expect the recession to deepen markedly in the coming quarters," Capital Economics analysts said.

With an economy on the rocks and unemployment soaring as a result, governments are caught between the need to spend more on welfare just as their revenues tank, putting even more pressure on already strained finances.

They pay a heavy political price too.

In Spain, where the economy shrank 0.3 percent in the three months to September, the UGT union said the figures showed "how the government’s policies are sinking us in an abyss of economic depression, massive unemployment and social inequality.

"Nothing is getting better, the situation is getting worse and the government is showing a total inability to get us out of the crisis," said the union which helped organise major protests on Wednesday.

Just in case the outlook was not dark enough, the European Central Bank warned Thursday that the eurozone faces an even deeper recession this year, with the single-currency economy to shrink 0.5 percent, rather than 0.3 percent.

Growth in 2013 will be only an anaemic 0.3 percent, not the 0.6 percent expected previously, an ECB survey of forecasters showed.

"The main factor behind the downward revision for 2012 was the prolonged uncertainty in the euro area, which was also reflected in weak economic indicators in summer and early autumn," the survey said.

Adding to the problems, inflation -- which requires tight policy control rather than stimulus to boost growth -- will hit 2.5 percent this year, up 0.2 percentage points, it said.

Thursday’s data showed the full 27-state European Union eked out third quarter growth of 0.1 percent, again after a contraction of 0.2 percent in the second, thereby narrowly avoiding recession.

Germany, Europe’s powerhouse economy, expanded 0.2 percent in the third quarter, slowing from 0.3 percent in the second and 0.5 percent in the first, highlighting how the crisis has undercut even the strongest.

France also managed 0.2 percent growth but Italy shrank 0.2 percent.

French Prime Minister Jean-Marc Ayrault, visiting Berlin, said his country’s performance was "promising but not sufficient: economic recovery, the battle for growth are underway and must absolutely not ease up, more the opposite."

The Economist magazine meanwhile carried a 16-page cover story to be published Friday on how France was "the time bomb at the heart" of the eurozone debt crisis, pointing to the frailties of its public finances and uncompetitive economy.

Non-euro Britain posted strong growth of 1.0 percent, helped by the London Olympic Games but its prospects are not good either -- the Bank of England on Wednesday predicted low growth for the next three years due to the eurozone crisis, tight credit conditions and inflationary pressures.

The British central bank also slashed its 2013 estimate to 1.0 percent from the 2.0 percent it gave only in August.

Howard Archer of IHS Global Insight said the debt crisis problems were now clearly being felt in the traditionally stronger states such as Germany and notably, the Netherlands which slumped 1.1 percent in the quarter.

"In the face of tightening fiscal policy in many countries, high and rising unemployment and persistent serious Eurozone sovereign debt tensions," the eurozone will likely weaken further and shrink 0.2 percent next year, Archer warned.

Copyright © 2012 AFP