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Double-dip recession confirmed in eurozone Double-dip recession confirmed in eurozone
(about 9 hours later)
The eurozone has tumbled into a double-dip recession as the crisis in Portugal, Spain and Greece spreads to other countries in the currency bloc. The head of the European Central Bank has warned that time is running out to resolve the crisis in the eurozone as the latest figures showed the 17 nations of the single currency have slid into a double-dip recession.
Eurozone GDP fell by 0.1% in the third quarter, after shrinking by 0.2% in the second quarter, plunging the region into a recession that economists fear could drag into next year. With financial markets convinced that even worse data will emerge over the winter, Mario Draghi urged policy makers to take full advantage of the breathing space won by the ECB when it announced in the summer it would buy unlimited amounts of government bonds from troubled euro zone countries.
The big surprise was the triple-A rated Netherlands, which saw its economy shrink by 1.1% in the third quarter, dragged lower by a 3.1% decline in investment and a 2.4% drop in exports. Economists had expected Dutch GDP to contract by just 0.2%. Austrian GDP also shrank by 0.1%. "With the ECB unconventional measures, we have been able to steady the course ... We have gained precious time, but this is not infinite", Draghi said in a speech in Milan.
But core countries such as France and Germany continued to show growth, for the time being. French GDP ticked up by 0.2% in the third quarter, compared with analyst expectations that the economy would remain at a standstill. That will be a rare piece of good news for the president, François Hollande, who has suffered a dramatic decline in popularity during his first six months in power. Shares fell on all the major European bourses after officials in Brussels announced that the euro zone was officially back in recession after a 0.1% fall in output in the third quarter. The decline followed a 0.2% drop in gross domestic product in the second quarter.
Germany also beat expectations with growth of 0.2% in the third quarter but Europe's biggest economy is clearly feeling the effects of the eurozone crisis. Growth has slowed from 0.5% in the first three months of the year, and 0.3% in the second quarter. Christine Lagarde, the managing director of the International Monetary Fund announced that she was cutting short a visit to Asia in order to hold more talks with European policy makers about how to end the crisis.
Portugal and Greece remain in very deep recessions, with output falling by 0.8% and 7.3% respectively – while the economies in Italy, Spain and Cyprus continued to contract. Lagarde has been urging swifter action to reduce Greece's debts to a sustainable level, but Angela Merkel ruled out the possibility that European governments would accept losses on their holdings of Greek bonds.
"I hope the time is near when we can reach the solution that is needed", Merkel said after a meeting with the French prime minister Jean-Marc Ayrault. "Of course we did not talk about debt haircuts, you know our view and that has not changed, nor should it."
Greece, where the economy shrank at an annual rate of almost 8% in the third quarter, is pressing George Osborne for details of Greek citizens who have moved funds into HSBC accounts in the tax haven of Jersey.
Greece's finance minister, Yiannis Stournaras, has written to the chancellor after the names of Greek citizens turned up on the list of HSBC account holders. "We had no idea about their existence and were surprised when their names were included on the list recently made public by HSBC," said a senior finance ministry official. "The minister sent the letter because he wants to get to the bottom of it. Tax evasion is one of our biggest problems."
Germany and France - the two biggest economies in the eurozone - posted modest growth of 0.2% in the third quarter, but this was more than offset by the recession spreading northwards from the countries on the single currency's southern periphery.
Germany's growth rate has slowed since the start of 2012, when it was expanding at a quarterly rate of 0.5%. France's growth was a surprise to the markets amid fears that it was heading back into recession. The growth followed data revisions which turned a flat economy in the second quarter into a 0.1% contraction.
As expected, Portugal, Spain, Italy, Greece and Cyprus all saw their economies contract in the third quarter, but the biggest surprise was the sharp 1.1% quarterly fall in Netherlands GDP, which was more than five times as large as the expected 0.2% drop. Austria posted a 0.1% decline in output.
Jennifer McKeown of Capital Economics said: "The business surveys point to far worse to come throughout the region in the fourth quarter. With austerity starting to hit French households and German unemployment beginning to rise, the outlook for domestic spending is bleak even in the core." She expects eurozone GDP to shrink by up to 0.7% this year, and another 2.5% in 2013.Jennifer McKeown of Capital Economics said: "The business surveys point to far worse to come throughout the region in the fourth quarter. With austerity starting to hit French households and German unemployment beginning to rise, the outlook for domestic spending is bleak even in the core." She expects eurozone GDP to shrink by up to 0.7% this year, and another 2.5% in 2013.
Economists said the data could prompt the European Central Bank to cut rates from 0.75% to 0.5% sooner rather than later. Howard Archer of IHS Global Insight said: "Indeed, an interest rate cut in December is very possible."Economists said the data could prompt the European Central Bank to cut rates from 0.75% to 0.5% sooner rather than later. Howard Archer of IHS Global Insight said: "Indeed, an interest rate cut in December is very possible."
Michael Taylor of Lombard Street Research, said: Weak growth in Germany and France in Q3 did not prevent another quarterly fall in real GDP in the euro area as a whole. This tips the EA economy back into recession, where it is likely to stay well into 2013. Fiscal retrenchment, low confidence levels and a weak economy all point to ongoing contraction in the euro."
Dutch decline
The big surprise in the eurozone GDP figures was the triple-A rated Netherlands, whose economy shrank by a dramatic 1.1% in the third quarter, far worse than expected, with economists having forecast a fall in output of just 0.2%.
Business and consumer confidence remain low and economists now warn that the Netherlands faces the prospect of another quarter of decline and its third recession in three years.
So, what went wrong? First, the Netherlands processes a lot of trade into and out of Europe. Holger Schmieding at Berenberg bank said: "If we look at the Netherlands as a big harbour, it reacts very sensitively to the gyrations of global trade. Just as London is disproportionately affected by the ups and downs of the global financial market, the Netherlands is disproportionately affected by the ups and downs of trade."
Then there is the stinging Dutch austerity programme. The new coalition government recently announced €16bn of new austerity measures on top of already significant cuts. Economists say the rise in VAT from 19% to 21%, in particular, is punishing already stretched household budgets. Wages fell 1% in real terms last year, while unemployment has been rising since the middle of last year and is at a 15-year high.
That combined with the ongoing eurozone crisis have battered consumer and business morale, in turn hitting investment. Last quarter's GDP was dragged lower by shrinking investment across the board. Business investment has dropped by almost 6% since the third quarter last year, while government investment shrank by 8.4%.