Germany cant stop euro zone from sliding into longest recession

Written by Reuters | Brussels/Berlin | Updated: May 16 2013, 09:17am hrs
The country grew by a weaker than expected 0.1%

Germany's economy crept back into growth at the start of the year but not by enough to stop the euro zone from contracting for a sixth straight quarter, and France slid into recession.

Falling output across the bloc meant the 17-nation economy is in its longest recession since records began in 1995. It shrank 0.2% in the January to March period, the EU's statistics office Eurostat said on Wednesday, worse than the 0.1% contraction forecast by a Reuters poll.

The misery continues, said Carsten Brzeski, a senior economist at ING in Brussels. Almost all core countries bar Germany are in recession and so far nothing has helped in stopping this downward spiral.

As well as France, the economy shrank for the quarter in Finland, Cyprus, Italy, The Netherlands, Portugal and Greece. Data last month showed Spain's economy contracted for a seventh consecutive quarter.

Germany, which generates almost a third of the euro zone's economy, grew by a weaker than expected 0.1%, skirting the recession that France succumbed to, but highlighting the devastating impact of the euro zone's debt and banking crisis that has driven unemployment to a record 19 million people.

France's downturn was its first in four years, after contracting by 0.2% in the first three months of the year, as it did in the last quarter of 2012.

Italy, the euro zone's third largest economy, reported its seventh consecutive quarter of decline, the longest since records began in 1970.

The euro zone's recession is now longer than the five quarters of contraction that followed the financial crisis in 2008/2009, although it isnt as deep.

The euro fell to a six-week low against a buoyant dollar, hurt by the anaemic figures which kept alive chances of more monetary easing by the ECB. The ECB cut rates to a record low earlier this month and its head, Mario Draghi, said it was ready to act again if the economy worsened.

Some EU leaders, who meet for a summit in Brussels next week are also trying to shift away from the budget cuts that have dominated the response to the debt crisis since 2009.

But it will be tough for another rate cut and a softening of austerity even if either happens to break a cycle in which governments are cutting spending, companies are laying off staff, Europeans are buying less and young people have little hope of finding a job.

Any recovery is going to be excruciatingly slow, said Nick Kounis, head of macroeconomic research at ABN AMRO.

A Reuters poll of 65 economists suggested growth should return in the second half of this year, but there will no strong recovery until at least 2015.

Interest rates at a record low and the ECB's promise to buy the bonds of struggling governments have calmed talk of a euro zone break-up, driving up equities and cooling bond yields.

But the reality for companies and households is of tight credit and frozen investment, meaning demand in places such as China and the US is the best hope for renewed growth.

Of most concern is the difference between Europe's two largest economies, Germany and France. It looks narrow over the first three months of the year, but European diplomats and officials fear France will continue to lag far behind, threatening the cohesion of the twin policy motor that has traditionally driven the European project.