Euro-Zone Economy Shrinks 2.5% in Quarter

By Matthew Saltmarsh

PARIS — The euro-zone economy plunged deeper into recession during the first quarter, as domestic demand weakened and exports flagged, according to figures on gross domestic product released Friday.

Analysts, however, suggested that the figures may represent a trough for the region’s economy.

G.D.P. declined by 2.5 percent from the previous quarter in both the 16 nations that use the euro currency and the 27-country European Union during the first quarter, according to an initial estimate from Eurostat, the E.U.’s statistical office. Both regions had seen G.D.P. decline 1.4 percent in the fourth quarter of 2008.

In Germany, the largest European economy, gross domestic product plunged 3.8 percent in the first three months of the year from the fourth quarter, when it fell 2.2 percent, the Federal Statistics Office in Wiesbaden said. Economists had forecast a 3 percent decline.

The decline was the largest since 1970, when official quarterly results were first formally published in West Germany. Germany’s G.D.P. rate has now fallen for four consecutive quarters. Both imports and exports declined.

France’s economy also shrank for the fourth straight quarter as companies cut investments and exports plunged. G.D.P. fell 1.2 percent from the fourth quarter, when it slipped 1.5 percent, the French statistics office Insee said. Insee also revised earlier data, revealing that France has been in a recession since the third quarter of 2008.

In Italy, the economy also contracted for a fourth straight quarter in the three months through March. G.D.P. shrank 2.4 percent from the fourth quarter, when it contracted by 2.1 percent, Istat, the statistics office in Rome, said. It was the biggest decline since the agency began publishing data in 1980.

Paul Mortimer-Lee, head of market economics at BNP Paribas in London, said the data, although “terrible,” suggest that the worst of the effects of the financial crisis on growth in Europe was probably felt during the first quarter, while in the United States the trough may have been the last quarter of 2008.

In the United States, gross domestic product shrank at an annual rate of 6.1 percent from January through March, its third straight quarter of decline.

Mr. Mortimer-Lee noted that some indicators in Europe are starting to point toward an improvement in activity, suggesting that the scale of the contraction for the rest of the year will moderate, probably helped by the manufacturing sector responding to declining inventory levels.

“It’s like being on a bungee rope,” he said. “After you go down so far, you have to come back; the question now is how far.”

Spain released data Thursday showing its economy shrank by 1.8 percent during the first quarter compared to the fourth quarter.

The European Commission this month lowered its forecast for growth in the European Union this year as world trade contracts, housing prices fall and consumers react to the weakening labor market.

But the commission, the executive arm of the E.U., was relatively sanguine about next year, arguing that the effect of tax breaks, interest-rate cuts and gains in asset prices should steady the economy.

It predicted that gross domestic product in both the European Union and the euro area would contract by a total of 4 percent this year and by 0.1 percent next year.

The E.U.’s estimates were slightly less pessimistic on the regional outlook than those of the International Monetary Fund, which last month forecast a contraction of 4.2 percent this year and 0.5 percent next year for the euro area. For the United States, the fund forecast a contraction of 2.8 percent this year and flat growth in 2010.

The slump in Europe has prompted the European Central Bank to lower its benchmark interest rate by 3 percentage points since October to a record low of 1.25 percent. It has suggested that it will announce further steps to ease borrowing conditions at its next meeting on Thursday.

Governments have also announced stimulus spending plans of varying degrees to try to bolster confidence, although rising deficit and debt levels are limiting the ability of most to enact the degree of public spending that is being seen in the United States.

European labor markets, which tend to react with a lag to changes in growth rates, will continue to be severely affected, the E.U. said, with the unemployment rate expected to increase to 11.5 percent in the euro area next year, from 9.9 percent this year. In Spain, it may touch 20.5 percent next year, almost doubling from 2008.

This article "Euro-Zone Economy Shrinks 2.5% in Quarter" originally appeared at The New York Times.