Signs of Broad Contagion in Europe as Growth Slows

Published data showed that the euro zone economy grew marginally in the third quarter, kept above water by France and Germany, in what analysts interpreted as probably a last gasp before debt problems dragged the Continent into recession.

Traders said the big moves in the bond markets came as investors continued to shed exposure to European debt.

With few buyers, interest rates on Italian government bonds again rose above 7 percent — the kind of market pressure that last week led to the ouster of Prime Minister Silvio Berlusconi.

But they also continued to increase in France, Spain and Belgium. They also moved upward in Finland, Austria and the Netherlands, which have relatively strong underlying financial positions and until recently had mostly been spared the full effects of the financial crisis.

“The concern is spilling over to the other candidates that could be next for the domino effect behind Italy,” said Millan Mulraine, an interest rate strategist at TD Securities in New York. “The ubiquitous nature of the increase in yields suggests that the problem is spreading well beyond the troubled peripheral countries.”

In recent weeks, the European Central Bank has been regularly buying government bonds to try to push down interest rates. But Mr. Mulraine said the bank bought a smaller amount than usual on Tuesday.

Without the central bank’s usual presence in the markets, bond prices fell and yields rose, and investors appeared to worry that a widening circle of European nations could be dragged into the Continent’s problems.

“While France has for weeks been under some market pressure, with fears over the country’s AAA-rating to the fore, the likes of the Netherlands and Finland had proved immune,” analysts at Daiwa wrote in a research note. “That no longer appears to be the case.”

Yields jumped a quarter of a percentage point in Spain, to nearly 6.35 percent, and about the same in France, to nearly 3.7 percent. They spiked even more in Italy and crossed the 7 percent level, which economists consider unsustainable. The gap between those rates and Germany’s 1.8 percent yield also widened to levels that some analysts saw as alarming.

Analysts said they expected the central bank to return to the markets soon, and with a much more aggressive program of bond buying, to put a ceiling on rates.

Compounding euro zone anxieties was a report Tuesday that gross domestic product for the region barely grew 0.2 percent from July through September, compared with the previous three months. That was the same growth rate as in the previous quarter.

In contrast, the United States economy grew by 0.6 percent in the third quarter from the second, while the Japanese economy grew 1.5 percent.

The data from Eurostat, the statistical office of the European Union, did nothing to alter a consensus among economists that euro area output had already begun to decline since September.

Anxiety about the sovereign debt crisis has led businesses and consumers to cut spending, and government austerity programs have contributed to deep recessions in countries like Greece and Portugal.

Economists define a recession as at least two consecutive quarters of declining output.

The third-quarter figures “have little bearing on the bigger question — namely how is the sovereign debt crisis going to be resolved and at what collateral damage to the real economy?” Jens Sondergaard, senior economist for Europe at Nomura, said in a note to clients.

The huge risk facing Europe is that debt problems and slower growth will create a downward spiral that policy makers may not be able to stop.

If economies slow, then government tax revenue will decline. That, along with higher borrowing costs, would increase fears that countries like Italy may not be able to service their debt. In that cycle, confidence and growth suffer further.

François Cabau, an analyst at Barclays Capital, said in a note Tuesday that if business confidence continued to fall during the rest of 2011, the downturn “could prove to be larger than we currently expect, depressing private domestic demand even further.”

Ample data has pointed to an impending slowdown in the euro area, including reports last week of declines in industrial production and retail sales.

The European Commission, citing painful budget-balancing measures that will weigh on output, cut its growth forecast last week for the 17 euro zone nations, to 0.5 percent in 2012, and predicted that Greece’s recession would deepen.

But even that gloomy forecast is starting to seem too optimistic.

Germany, the largest economy in Europe, has been bucking the downward trend so far. Its economy grew by 0.5 percent in the third quarter, compared with 0.3 percent in the second, according to the data released Tuesday.

French growth continued to hold up in the third quarter, but that is not expected to last, either.

Olli Rehn, the European commissioner for economic and monetary affairs, said last Thursday that the European Union’s economic recovery had “now come to a standstill, and there is a risk of a new recession.”

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