Bloomberg News

EU Crisis Damage Seen in Worst Quarter Since Lehman Wake

February 11, 2013

European Recession Seen Reaching Trough as ECB Waits

Gross domestic product of the 17-nation bloc probably shrunk 0.4 percent in the fourth quarter, according to the median of 28 estimates gathered by Bloomberg News. Photographer: Robin Uterecht/AFP via Getty Images

Euro-area economic data due this week will probably show the damage inflicted by the region’s sovereign debt crisis with the worst quarterly decline in output for almost four years.

Gross domestic product shrank 0.4 percent in the fourth quarter, according to the median of 45 estimates gathered by Bloomberg News. That would be the biggest decline since the first quarter of 2009, when GDP fell 2.8 percent in the wake of the collapse of Lehman Brothers Holdings Inc. The data is due to be published on Feb. 14.

While measures to stem the region’s debt turmoil have helped curb sovereign bond yields from Spain to Greece, at least seven countries of the 17-nation bloc are in recession, leaving 18.7 million people out of work. The European Central Bank President Mario Draghi said last week that “economic weakness” will prevail in early 2013 even as the economy shows confidence stabilizing “at low levels.”

The fourth quarter “is probably the trough of the cycle, Draghi is hopeful that it will be,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “We should see some improvement in economy in the first half of this year. The question is, whether it’s strong enough” given the risks that lie ahead, he said.

Brussels Meeting

Euro-area finance chiefs meet in Brussels today to discuss aid to Cyprus and Greece as a tightening election contest in Italy and corruption allegations in Spain threaten to reignite the region’s debt crisis. Group of 20 finance chiefs and central bankers will gather in Moscow later this week.

The Stoxx Europe 600 Index fell 0.6 percent today. The euro climbed 0.3 percent to $1.3410, snapping a three-day decline.

European Central Bank council member Jens Weidmann said today the euro isn’t seriously overvalued and warned governments against trying to weaken the currency.

“Latest indicators don’t signal a serious overvaluation of the euro despite its recent appreciation” and “politicians should hold on to the established division of labor,” said Weidmann, who heads Germany’s Bundesbank. “An exchange-rate policy to specifically weaken the euro would lead to higher inflation in the end.”

‘Double Whammy’

The European Union’s statistics agency, Eurostat, will publish GDP data on Feb. 14 at 11 a.m. in Luxembourg. That will be the culmination of a series of GDP reports the same day from France, Germany, Austria, Slovakia, the Netherlands, Italy, Portugal and Greece.

While the euro region’s economy hasn’t grown since the third quarter of 2011, the pace of decline in GDP, driven by a continent-wide push to narrow budget deficits and exacerbated by stalling exports, may be slowing now as demand picks up in the U.S. and China.

“The fourth quarter was a double whammy for Europe, with austerity and exports to the U.S. falling off,” said Gilles Moec, co-chief European economist at Deutsche Bank in London. In the first quarter “there should be a gradual acceleration in external traction to help lift us out of that predicament.”

The euro-area economy won’t return to growth until the second quarter as a recovery in Italy is delayed and France continues to shrink, according to Bloomberg News’s monthly survey published Jan. 17. Economists expect GDP to stay unchanged in the three months through March, before rising 0.1 percent and 0.2 percent in the second and third quarters, the survey showed. For the year, the economists predict a 0.1 percent decline.

Downside Risks

“The risks surrounding the economic outlook for the euro area continue to be on the downside,” Draghi said at his monthly news conference on Feb. 7, after the ECB kept its benchmark interest rate on hold at 0.75 percent.

Germany, the euro region’s biggest economy, and France, its next largest, are increasingly showing signs of diverging. German industrial production rose in December, adding to signs that the nation’s recovery is gathering pace. Though GDP probably fell 0.5 percent in the fourth quarter, it is expected to rebound with 0.1 percent expansion in the first quarter of this year, Bloomberg surveys show.

“Between France and Germany, Germany may be decoupling,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London.

France is on the brink of falling back into its second recession (FRGEGDPQ:US) in four years. French output probably shrank 0.2 percent in the fourth quarter, according to the median forecast of 28 economists in a Bloomberg News survey. Economists in the monthly survey by Bloomberg predict a further decline in the first three months of 2013.

Hollande’s Battle

President Francois Hollande is battling with jobless claims at a 15-year high as companies including PSA Peugeot Citroen, Renault SA and Alcatel-Lucent SA cut tens of thousands of jobs. He’s also struggling to slash the state budget deficit to 3 percent of GDP this year from 4.5 percent in 2012 -- a target that the European Commission and the International Monetary Fund expect to be missed unless further action is taken.

“France is in quite a special position,” Moec said. “The fiscal contraction there is now reaching its peak while most other countries hit it in 2011 and 2012. Plus the corporate sector was late in adjusting.”

French industrial production fell 1.8 percent in the fourth quarter, while manufacturing output dropped 2.5 percent, national statistics office Insee said today.

Rajoy Controversy

Spain and Italy, where GDP has probably declined for six straight quarters, are also the focus of concern about rising political risk. The Spanish government is facing corruption allegations, though Premier Mariano Rajoy denied receiving illegal cash payments. In Italy, the euro area’s No. 3 economy, an election that is less than two weeks away may yield a hung parliament.

“Unfortunately in the euro area, political risk tends to blow the numbers around,” Alexandrovich said. “We could come out of the Italian election later this month and find that nothing has been settled, then markets begin to sell off and we return to, or near return to, the early part of 2012.”

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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