European Economy on the Cusp of Another Widespread Recession

Europe’s economy contracted in the fourth quarter as exports and consumer spending declined and investors pulled out of equities. Gross domestic product in the European Union shrank 0.3 percent, the 27-nation bloc’s statistics office said today, confirming an estimated published on February 15. Exports fell 0.4 percent in the last three months of 2011, compared to the previous quarter, when exports grew 1.4 percent. Household spending declined 0.4 percent and investment dropped 0.7 percent.

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Despite the contraction, the economy shows “tentative signs of stabilization,” said European Central Bank President Mario Draghi. The central bank’s efforts to pump cash into the economy have helped ease concern about a credit crunch while buying governments time to agree on measures to contain the debt crisis. But while there have been signs that Germany is returning to growth, it seems likely the euro-zone economy will contract further in the first quarter of 2012, and possibly the second, says Howard Archer, chief European economist at IHS Global Insight in London.

Still, the economy will likely be “turning the tide in the coming months,” Olli Rehn, the EU’s commissioner for economic and monetary affairs, said today. The ECB has injected more than a trillion euros into European banks as part of the biggest refinancing operation in its history, and policymakers, including Draghi and Ewald Nowotny from Austria, believe the central bank loans will be channeled to households and companies, helping to boost the economy.

While prospects are slightly improved with the ECB’s three-year bank loans and a bailout deal for Greece, euro-area services output shrank more than estimated in February, a survey of purchasing managers showed yesterday, led by Italy and Spain. The 17-nation euro economy may shrink 0.3 percent in 2012, driven by a 1.3 percent contraction in Italy and a projected 1 percent contraction in Spain, the European Commission said on February 23. Germany’s economy, Europe’s largest, will expand 0.6 percent.

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