Euro-zone economy in record first-quarter fall - MarketWatch

Euro-zone economy in record first-quarter fall - MarketWatch
LONDON (MarketWatch) -- A deep recession took a turn for the worse in the first quarter of 2009, shrinking the euro-zone economy by a record amount as exports plunged and industrial output took a devastating hit, official data showed Friday.

The 16-nation euro zone saw first-quarter gross domestic product shrink by 2.5% compared to the final quarter of 2008, the statistics agency Eurostat said in a preliminary estimate. Compared to the same period a year ago, GDP dropped by 4.5%.

Recent improvement in purchasing managers' indexes and other surveys indicate the economy will contract at a slower pace in the second quarter, though that may be cold comfort given the scope of the plunge in the first quarter. Economists note that the surveys, while showing steep falls in output, still proved too optimistic in the first quarter.

"Overall, today's data are a timely reminder that while there are green shoots, they are growing in very unfertile ground at present and will take a long time to blossom," said Dominic Bryant, an economist at BNP Paribas, in a research note.

Economists had forecast a quarterly drop of 2.2% and an annual decline of 4.1%.

The first-quarter contraction follows on the heels of a 1.6% quarterly drop in the final three months of 2008.

Economists at Capital Economics said a weighted average of GDP data from euro-zone countries show GDP has never fallen at such a sharp pace.

"Remarkably, the biggest drop before now was in Q4 last year, when the economy shrank by 1.6%. This highlights the severity of this recession, which has so far been deeper and longer than that in 1974-75," said Daniele Antonucci, European economist at Capital Economics, in a research note.

The initial Eurostat estimate offers few details, but the contraction was likely driven by falling investments and exports, while inventories also likely subtracted from growth, said Marco Valli, chief euro-zone economist at UniCredit, in a research brief. Consumption probably saw only a "relatively modest" decline, he said.

Individual country data released earlier Friday had pointed to a steeper-than-expected fall for the region.

The German economy contracted 3.8% during the first quarter for a year-on-year decline of 6.9%, the worst since records began in 1970, as exports tumbled in Europe's largest economy.

Economists had been pegging a 3.4% quarterly contraction.

The French economy didn't fare much better, contracting at a 1.2% quarterly and a 3.2% annual rate.

Italy's economy shrank 2.4%, or 5.9% from a year earlier.

Figures earlier this week showed Spain's economy fell 1.8% from the previous quarter.

The Federal Statistical Office, in detailing the 3.8% quarterly contraction for the German economy, said that exports fell much more than imports and that capital formation was considerably lower.

There were slight increases from household and government expenditure. But the German economy has never been particularly consumer oriented.

The INSEE statistics agency in France said capital formation dropped for the second straight quarter, down 2.3%, and exports and imports both "collapsed," with exports down 6% and imports down 5.3% on a quarterly basis.

As in Germany, French household consumption edged up slightly, rising 0.2%.

The euro immediately skidded on the release of the German data, and the French data released 45 minutes later didn't help. The euro traded at $1.3554 versus the dollar in recent trade, down 0.6% on the day.

William L. Watts is a reporter for MarketWatch. Steve Goldstein is MarketWatch's London bureau chief.
May 15, 2009, 6:20 a.m. EST
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