Euro zone slips back into recession

The 17-member euro zone has slipped into recession following two quarters of economic output contraction, the first time it has been in recession since it experienced five consecutive quarters of recession leading up to 2009.

While the deepening European woes may seem far afield from New Zealand, Europe is China's largest customer and any Chinese contraction, or expansion, is felt in New Zealand and Australia.

News of the euro zone recession came a day after millions of Europeans held rallies against increasingly stringent austerity measures; protests in Portugal, Spain and Italy were marred by violence.

A rebound in the euro zone could be vital for the rest of the world as the US and China struggle with the impact of the crisis on their companies' ability to grow and prosper.

European equities extended their losses yesterday, echoing a sharp decline overnight on Wall Street in the US, as the rising threat to global growth from the US and Europe prompted investors to reduce their exposure to risky assets, Reuters reported.

The euro zone quarterly economic output to September fell 0.1% in the third quarter following a 0.2% decline in the second quarter, forcing the euro zone's 9.4 trillion ($NZ14.8 trillion) economy officially into recession.

Italy and Spain have been in contraction for a year already and Greece is suffering an outright depression.

Craigs Investment Partners broker Peter McIntyre said between the deepening European crisis and the $US607 billion ($NZ748.4 billion) "fiscal cliff" of tax hikes and public spending cuts being faced by the United States, investors, consumers and businesses are subsequently "sitting on" billion of dollars in savings and adopting a "wait and see" attitude.

"Without investment in businesses or consumer spending, the economic wheels will start turning slower and slower," he said yesterday.

He cited recent retail data out of the US, Australia and New Zealand which showed recent downturns in retail spending.

Germany and France, the euro zone's biggest economies, could not save the bloc from a double-dip recession even though both countries managed 0.2% growth in the quarter, Reuters reported.

Large, countries like Italy, Spain and the Netherlands all contracted and Belgium, a big exporter, stagnated.

Mr McIntyre said "We're seeing the problems moving into the core [of Europe]. Germany has been the one showing strength."

Paul De Grauwe, an economist with the London School of Economics, said Europe was getting into a double-dip recession "which is entirely self-made".

"It is a result of excessive austerity in southern countries and unwillingness in the north to do anything else," he said.

Not everyone shares that view and the European Commission said labour costs were falling and exports rising in Greece, Portugal, Spain and Ireland. It said austerity was a necessary evil to bring down unsustainable budget deficits.

The European Commission sees a 0.4% contraction for the euro zone in all of 2012.

Hopes for a recovery next year are also fading, with the European Commission saying the economy will grow just 0.1% in 2013.

 

 

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