Eurozone GDP slips by 0.3%

The eurozone took two steps back in the final quarter of 2011, with five members sliding back into recession.

While Germany and France performed better than expected, five of the EU’s major members, including Italy, suffered due to austerity measures that discouraged consumers from spending and businesses from investing.

The 17-nation eurozone’s GDP fell by 0.3% from the third quarter of the year; the first such decline since the second quarter of 2009. While the contraction was less than economists had predicted (0.4%), smaller countries felt the deep impact.

Christian Schulz, an economist at Berenberg Bank in London, is looking on the bright side however. The fact that France actually grew by 0.2%, defying expectations of a decline due to bolstered exports and increased business investment, indicates in his view that “Europe is not going into freefall, it’s not like the post-Lehman crisis.”

“The key for the outlook,” Schulz continued, “remains whether the debt crisis can be contained. For the moment, the markets are giving Europe the benefit of the doubt.”

Many economists, like Schulz, agree that the core regions of the eurozone remain intact, and they hold on to hopes that the worst is over.

Howard Archer, IHS Global Insight chief European and UK economist, is not so optimistic. While he agrees that the decline in the GDP was generally more drastic in the periphery economies like Italy, which plunged by 0.7%, Spain, Portugal and Greece, he finds the data alarming.

“We doubt that the Eurozone will be able to avoid further contraction in the first quarter and very possibly the second,” says Archer, “In the face of tighter credit conditions, a further tightening in fiscal policy, the ongoing pressures facing consumers and limited global growth, The Eurozone sovereign debt crisis is likely to continue to weigh on confidence and hold back business investment.”

In addition to the enduring effects of the drop in growth, Archer points to the expectation that the ECB will cut interest rates further, with a move from 1% to 0.75% occurring in the second quarter.

Evidence on the other GDP components among the individual Eurozone economies is mixed. Net trade was negative in Germany, but was strongly positive in France. A marked running down of stocks limited GDP growth in France.

Regarding the lack of consumer spending, Archer recognizes that consumers faced rising unemployment, limited purchasing power due to elevated inflation, muted wage growth, and an increasing fiscal squeeze in a number of countries. Overall, eurozone consumer confidence hit a 28-month low in December, while eurozone retail sales volumes contracted by 0.7% in the fourth quarter.

Even the German Federal Office reported that consumer spending “showed a slight decrease”, and a sharp drop was seen in the Netherlands. It’s not clear whether the pressures on consumers and investors will lessen in the near future.

Archer doesn’t foresee a bright future for the eurozone just yet. Growth will certainly be slow and pressure on the economy will need to ease considerably.

“Assuming some easing in sovereign debt tensions, reduced inflation boosting consumer spending power, and a pick-up in global growth, the Eurozone will start growing gradually again during the second half of 2012. Even so, we still see Eurozone GDP contracting by 0.6% overall in 2012, held back significantly by extended contraction in Italy and Spain.”