Eurozone contracts the most

Bloomberg

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Europe’s economy contracted the most in at least 13 years in the fourth quarter, compounding pressure on the European Central Bank to reduce interest rates to the lowest ever next month.

Gross domestic product in the euro region declined 1.5 percent from the previous three months, the European Union’s statistics office in Luxembourg said Friday. That was more than the 1.3 percent economists expected and the most since euro-area GDP records began in 1995. From a year earlier, GDP fell 1.2 percent in the fourth quarter, the only full-year drop on record.

With the first recession in the euro’s 10-year history deepening, companies from carmaker Renault to software-maker SAP are cutting jobs and scaling back production. Six ECB policy makers, including President Jean-Claude Trichet, have said the central bank may cut rates to a record low from the current 2 percent and consider other measures to stimulate growth.

"The news is dire," said Kenneth Wattret, senior economist at BNP Paribas in London. "Compared to the early 1990s recession, which was painful, this is twice as big."

The economies of both Germany and France, the two largest in the euro region, shrank by the most in more than two decades in the latest quarter. Spain, Italy, the Netherlands and Austria also contracted in the final three months of last year, national statistics offices reported. The U.K. economy, the euro area’s biggest trading partner, shrank 1.5 percent in the quarter.

For the euro region, "we see at least another three quarters of contraction, and we should brace for a huge rise in unemployment," BNP’s Wattret said. "The ECB will cut by at least half a point next month and may have to consider something even more radical."

The euro interbank offered rate, or Euribor, for three-month loans fell to a record low on speculation the ECB will reduce its key rate next month. The rate dropped two basis points to 1.94 percent Friday, the European Banking Federation said. That is the lowest since the euro’s introduction in 1999 and down from a record 5.39 percent on Oct. 10. The three-month euro overnight index average rate, which shows traders’ expectations for the central bank’s key rate, was at 0.98 percent, down from 1.2 percent at the end of January and 1.73 percent on Dec. 31.

Rate cut on the horizon

ECB board members Lucas Papademos, Juergen Stark and Jose Manuel Gonzalez Paramo as well as Spanish central bank Governor Angel Fernandez Ordonez and Belgian Governor Guy Quaden said this week that the Frankfurt-based bank may cut rates next month.

"The latest data and survey indicators point to a substantial decline in real gross domestic product in the fourth quarter," ECB Vice President Papademos said on Feb. 11. "Stormier weather may still lie ahead," and "a further easing of monetary policy may be appropriate" in March.

The economic slump may leave European policy makers under pressure at this weekend’s meeting in Rome of finance ministers and central bankers from the Group of Seven industrial nations. U.S. Treasury Secretary Timothy Geithner plans to encourage colleagues to take "bold actions" to reverse the economic and financial crisis, according to a U.S. Treasury official.

The contraction in Europe "is worse than the U.S.," said Jim O’Neill, chief economist at Goldman Sachs Group in London. "Given the shock started in the U.S., that’s quite an achievement." The U.S. economy contracted 1 percent in the fourth quarter from the prior three months, when it shrank 0.1 percent, according to the EU statistics office. From the year-earlier quarter, U.S. GDP declined 0.2 percent. In Europe, demand for everything from software to cars is withering. SAP, the world’s biggest maker of business-management software, said on Jan. 28 that it will slash more than 3,000 jobs and freeze salaries this year as the economic slump hurts demand. European car sales plunged 27 percent in January to the lowest level in two decades, the European Automobile Manufacturers’ Association said in Brussels Friday.

Infineon Technologies Chief Executive Officer Peter Bauer said Thursday that Europe’s second-largest maker of semiconductors faces a "difficult year" filled with "tough challenges."

The global economy will grow the least since World War II this year as more than $2 trillion of losses from the financial crisis cripple banks, the International Monetary Fund predicted Jan. 28. The euro region will contract 2 percent in 2009, the IMF forecast.