Economy: Eurozone teeters on brink of recession after output drops for the first time

Economy: Eurozone teeters on brink of recession after output drops for the first time

Europe's single currency zone suffered its first period of falling output during the spring as its three largest economies - Germany, France and Italy - shrank, according to figures released yesterday.

Eurostat, the EU's statistics office, said gross domestic product in the 15 countries comprising the eurozone contracted by 0.2% in the second quarter of 2008, the first time growth has been negative since the launch of the euro in 1995.

A combination of spiralling commodity prices and the credit crunch meant Germany, Europe's biggest economy, contracted by 0.5% between April and June. GDP in France and Italy fell 0.1%, while a collapsing housing market meant Spain expanded by only 0.1%. The deteriorating state of the Spanish economy prompted an emergency meeting of the cabinet to approve a €7.8bn (£6.24bn) package of fiscal measures to boost growth.

After the meeting, Spain's prime minister, José Luis Rodríguez Zapatero, said: "The situation we face is a situation of stagnation and steep slowdown."

Germany's deputy economy minister, Walther Otremba, said he could not rule out the possibility that the economy would weaken again in the third quarter, thereby fulfilling one of the definitions of recession, but the country's central bank was relatively upbeat about Germany's prospects. "The German economy has got to get through a rough patch for growth in the coming months," it said. "But, overall, there's no reason for excessive.....continued below

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pessimism based on the development of the first half of the year."

The eurozone's annual growth rate slipped from 2.1% in the first quarter to 1.5% in the second, with government officials and financial markets expecting a further slowdown in the third quarter after gloomy data for business and falling consumer confidence across the continent.

Stuart Bennett, a strategist at Calyon, said: "There is a good chance the economy is already in recession, but even if it isn't, the outlook remains for subdued growth in the quarters to come."

Analysts said the weakness of the eurozone was likely to hit UK exports - singled out as the lone bright spot for the economy by the Bank of England in Wednesday's inflation report.

Paul Dales, an economist at Capital Economics, said the problems of the eurozone economy could trigger a decline in British export growth from 20% to 10%. The eurozone accounts for about 50% of the UK's export of goods and services, and a fall of this amount would reduce export growth by about 5 percentage points and knock 1.2 points off UK GDP growth.

"Net trade is still likely to make a small, positive contribution to GDP growth this year and next," Dales said. "But this will be due to a weakening in import growth as the domestic economy weakens, rather than a major strengthening in export growth. And it will not be enough to prevent the UK from entering a recession and from activity slowing by even more than the Bank of England expects."

Smaller eurozone members fared better in the second quarter, with Greece expanding 0.6%, Austria and Portugal 0.4%, and Belgium 0.3%. The Netherlands stagnated, while Ireland has yet to announce its growth figures for the second quarter after contracting in the first.