Traverse City Record-Eagle

Business

November 16, 2012

Eurozone slides into recession

Decline was in line with expectations

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LONDON (AP) — The 17-country eurozone has fallen back into recession for the first time in three years as the fallout from the region's financial crisis was felt from Amsterdam to Athens.

And with surveys pointing to increasingly depressed conditions across the 17-member group at a time of austerity and high unemployment, the recession is forecast to deepen, and make the debt crisis — which has been calmer of late — even more difficult to handle.

Official figures Thursday showed that the eurozone contracted by 0.1 percent in the July to September period from the quarter before as economies including Germany and the Netherlands suffer from falling demand.

The decline reported by Eurostat, the EU's statistics office, was in line with market expectations and follows on from the 0.2 percent fall recorded in the second quarter. As a result, the eurozone is technically in recession, commonly defined as two straight quarters of falling output.

The eurozone economy shrank at annual rate of 0.2 percent during the July-September quarter, according to calculations by Capital Economics.

"The eurozone economy will continue its decline in Q4 and probably well into 2013 too — a good backdrop for another debt crisis," said Michael Taylor, an economist at Lombard Street Research.

Because of the eurozone's grueling three-year debt crisis, the region has been the major focus of concern for the world economy. The eurozone economy is worth around (euro) 9.5 trillion, or $12.1 trillion, which puts it on a par with the U.S.. The region, with its 332 million people, is the U.S.'s largest export customer, and any fall-off in demand will hit order books.

While the U.S has managed to bounce back from its own recession in 2008-09, albeit inconsistently, and China continues to post strong growth, Europe's economies have been on a downward spiral — and there is little sign of any improvement in the near-term.

Last week, the European Union's executive arm forecast the eurozone's economy would shrink 0.4 percent this year. Then only a meager 0.1 percent growth in 2013.

The eurozone had avoided returning to recession since the financial crisis following the collapse of U.S. investment bank Lehman Brothers, mainly thanks to the strength of its largest single economy, Germany.

But even that country is now struggling as exports drain in light of the economic problems afflicting large chunks of the eurozone.

Germany's economy grew 0.2 percent in the third quarter, down from a 0.3 percent increase in the previous quarter. Over the past year, Germany's annual growth rate has more than halved to 0.9 percent from 1.9 percent.

Germany's Chancellor, Angela Merkel, tried to strike a positive note when she spoke to reporters in Berlin Thursday.

"I think we all are working on getting back on our feet again rapidly," she said.

"We see that economic growth is slowing, that overall we have a small drop in the eurozone but I'm also very optimistic that if we do our political homework ... we will again have growth after this small decline."

Perhaps the most dramatic decline among the eurozone's members was seen in the Netherlands, whose economy shrank 1.1 percent on the previous quarter.

Five eurozone countries are in recession — Greece, Spain, Italy, Portugal and Cyprus. Those five are also at the center of Europe's debt crisis and are imposing austerity measures, such as cuts to wages and pensions and increases to taxes, in an attempt to stay afloat.

As well as hitting workers' incomes and living standards, these measures have also led to a decline in economic output and a sharp increase in unemployment.

Spain and Greece have unemployment rates of over 25 percent. Their young people are faring even worse with every other person out of work. As well as being a cost to governments who have to pay out more for benefits, it carries a huge social and human cost.

Protests across Europe on Wednesday highlighted the scale of discontent and with economic surveys pointing to the downturn getting worse, the voices of anger may well get louder still.

"The likelihood is that this anger will continue to grow unless European leaders and policymakers start to act as if they have a clue as to how to resolve the crisis starting to unravel before their eyes," said Michael Hewson, markets analyst at CMC Markets.

Europe has no doubt made some progress this year in allaying some of the worst fears in the markets, notably through the announcement of new bond-buying program from the European Central Bank. However, with Greece still teetering on the edge and the eurozone in recession, the economic storms are never far away.

Mario Draghi, the ECB's president has been widely credited for helping foster the more optimistic tone in the markets but he admits there's still a long way to go.

"The year that is about to end will be remembered not only for the effects the European sovereign debt crisis has had on the euro and for the significant weakening of the European economy, but also for the responses to these challenges by the ECB, national governments and the European Union," he said in a speech at Univerisita Bocconi in Milan.

"Ultimately, it is up to governments to dispel once and for all the persistent uncertainties that markets perceive and citizens fear," Draghi added.

The wider 27-nation EU, which includes non-euro countries, avoided the same recession fate as the eurozone. Eurostat said the EU's output rose 0.1 percent during the third quarter, largely on the back of an Olympics-related boost in Britain.

The EU's output as a whole is greater than the U.S. It is also a major source of sales for the world's leading companies. Forty percent of McDonald's global revenue comes from Europe - more than it generates in the U.S. General Motors, meanwhile, sold 1.7 million vehicles in Europe last year, a fifth of its worldwide sales.

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