Euro Watch: Euro Zone Economy Shrank at Year-End

PARIS — The euro zone economy ended the year on a sour note, official data confirmed Wednesday, with major indicators shrinking across the 17-country currency zone.

Investors nevertheless pushed European stock indexes to their highest levels in more than four years, following on a rally Tuesday on Wall Street that sent the Dow Jones industrial average to its highest-ever level.

Gross domestic product in the euro zone shrank 0.6 percent in the October-December quarter from the prior three months, Eurostat, the statistical agency of the European Union, reported from Luxembourg. The figure, the same as the initial estimate made Feb. 14, confirmed the gloom surrounding the region’s economic prospects.

Analysts do not expect the data Wednesday to have much influence on the European Central Bank’s governing council, which meets Thursday to set interest rates. While central bank policy makers may judge that there is sufficient economic justification to take new measures, including cutting their main interest rate target from the current 0.75 percent, the inconclusive election last month in Italy will likely lead to a cautious stance in Frankfurt, they said.

All of the major euro area economies shrank in the fourth quarter, with Germany contracting 0.6 percent, France down 0.3 percent, Spain down 0.8 percent and Italy down 0.9 percent.

Household spending fell by 0.4 percent from the third quarter, while investment fell 1.1 percent and exports fell 0.9 percent.

For all of 2012, G.D.P. in the euro zone shrank by 0.9 percent from a year earlier, Eurostat said.

“The euro zone is clearly the main weak link in the global economy,” Andrew Kenningham, an economist in London with Capital Economics, said. “And it’s more likely that it will get worse than better.”

He forecast the euro zone would contract by 2 percent in 2013 from 2012, as Spain, Italy and France struggled.

By contrast, Japan, where G.D.P. fell 0.1 percent in the fourth quarter from the third, will probably manage growth of about 1 percent this year, he said, while the United States, which posted a scant 0.1 percent fourth-quarter gain, will probably grow by about 2 percent in 2013.

The sovereign debt crisis that has forced Greece, Ireland and Portual to seek bailouts and raised borrowing costs to dangerous levels for Spain and Italy has been treated with the medicine of tax increases and government spending, restoring market confidence at the cost of social pain. Just Friday, Eurostat reported that euro zone unemployment had risen in January to a record 11.9 percent from 11.8 percent in December.

Despite that, investors remain bullish on European equities, pushing the Euro Stoxx 50, a barometer of euro zone blue chips, to its highest since September 2008, when the collapse of Lehman Brothers touched off the worst period of the financial crisis. On Tuesday, the Dow Jones industrial average rose to an all-time high, a performance that analysts attributed to investors’ fears about the economic future beginning to recede.

Gary Jenkins, managing director of Swordfish Research in London, said the stock market gains could be explained partly by European finance ministers this week taking a somewhat more “dovish” tone on the need for austerity measures in the euro zone.

Liquidity poured by central banks into the financial system, led by the U.S. Federal Reserve, has also contributed, he said.

“We’ve had a tremendous amount of monetary stimulus thrown at this market,” he said.

Mr. Jenkins said he expected the rally to last for as long as the economic data continued to show some improvement, or at least not to get substantially worse.

Paradoxically, he said, very strong data could slow the gains, since real economic growth would lead central banks to begin thinking about an end their easing policies.

Mr. Jenkins said he expected the European Central Bank to stand pat on Thursday. “If they moved to cut rates now, it might seem fairly panicky,” he said, adding that such a move would be unnecessary, since borrowing costs in Italy and Spain have come down from the levels last year that fueled worries about bailouts.

But investors will be keenly watching the press conference after the announcement with Mario Draghi, the E.C.B. president, he said, for clues about the central bank’s future direction.

In particular, he said, Mr. Draghi would be quizzed about his thoughts on outright monetary transactions — secondary market purchases of sovereign bonds — that the E.C.B. proposed as a means of aiding embattled governments, and how the bank could help Italy if it became necessary.

The transactions were conceived as aid to be granted when a government requested assistance, Mr. Jenkins noted, but the mechanism “doesn’t fit the bill when you don’t have a government.”

In mid-afternoon trading in Europe the Euro Stoxx 50 was up 0.5 percent, and the FTSE 100-share index in London was up 0.29 percent.

Asian indexes were higher, following on the performance of the Dow the day before. The Nikkei 225-stock index in Tokyo closed up 2.13 percent, and the Hang Seng index in Hong Kong finished up 0.96 percent.

The euro was at $1.3038, up slightly from $1.3020 late Tuesday in New York.

Article source: http://www.nytimes.com/2013/03/07/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss