Last updated: November 15, 2012 2:26 pm

Eurozone slides back into recession

The eurozone fell back into recession for the first time in three years as the deepening sovereign debt crisis in peripheral nations dragged down the core northern economies of the 17-member bloc in the third quarter of 2012.

Gross domestic product in the euro area shrank 0.1 per cent in June to September, compared with the previous three months when it fell 0.2 per cent, as the economies of Greece, Italy, Spain, Portugal, Austria and the Netherlands contracted sharply, according to the EU’s statistics office.

Economist said the latest data indicate that the debt crisis in the periphery of the eurozone was spilling over into Europe’s strongest economies, suggesting that the recession could continue at least until the end of the year.

“An end to the recession in the eurozone is still out of sight,” said Christoph Weil, economist at Commerzbank in Frankfurt.

“A decline in GDP now looks likely for Germany too in the last quarter. Given the uncertain future of the monetary union, businesses are hesitating with investment.”

German economic growth slowed in the third quarter, adding to evidence that Europe’s largest economy is flagging on the back of the crisis.

GDP rose 0.2 per cent – slower than the 0.3 per cent increase in the second quarter – as Germany’s manufacturing sector, the engine of the eurozone’s economic growth, weakened further in October despite exports continuing to grow.

“On average, our growth forecast [for Germany] remains on track, with economic activity remaining flat or even shrinking slightly in the second half of this year,” said Andreas Rees, chief German economist at UniCredit.

Better than expected growth in France, Europe’s second largest economy, which expanded 0.2 per cent in the third quarter from a revised 0.1 per cent contraction in the previous quarter, had raised hopes that a recession could be avoided.

However, a sharp contraction in the Netherlands, the eurozone’s fifth-largest economy where GDP shrank 1.1 per cent from 0.1 per cent growth in the previous quarter, erased any chances that the euro area could escape a “technical” recession – defined as two consecutive quarters of contraction.

“The debt crisis in the periphery, political uncertainty post the election and uncertainty over the future of the mortgage interest relief scheme have weighed heavily on the Dutch economy,” said Axel Lang, economist at Credit Suisse.

Other data this week also highlight the spillover effects of the debt crisis that has engulfed Europe’s periphery – in September eurozone industrial production fell at the fastest rate in three years, down 2.5 per cent from August.

An increasing number of companies have been forced to close their operations in certain European markets, shedding thousands of jobs, as revenues have collapsed for many due to waning consumer demand.

The eurozone crisis has cost companies $2tr in lost revenues globally, according to a new study by Grant Thornton, which along with record high unemployment underscores the long-term damage that is being caused by the crisis, analysts said.

The wider EU avoided recession, recording growth of 0.1 per cent in the third quarter – largely thanks to an Olympics-related boost in the UK, where GDP rose 1 per cent compared with a 0.4 contraction in the previous quarter. However, on an annualised basis the 27-country bloc contracted 0.4 per cent.

Seperate EU data showed that eurozone annual inflation fell to 2.5 per cent in October, down from 2.6 per cent in September, thanks to softening energy prices.

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