Drop In First Quarter Euro-Zone GDP May Mark The Bottom

Gross domestic product (GDP) in the 16-country Eurozone fell the most in 13 years in the first quarter as industrial exports plummeted, the European Union’s statistics office in Luxembourg reported Friday.  However, some analysts are convinced the data indicates an economic bottom has been reached.

Eurozone economic activity dropped 2.5% from the fourth quarter, the biggest drop since the data was first compiled in 1995.  The drop exceeded the 2% decline economists forecast in a Bloomberg News survey.

“The markets seem to be suggesting a real danger that we are about to see a six- to eight-week period that is very risk- negative,” Citigroup Inc. (C) currency strategists Tom Fitzpatrick in New York and London-based Shyam Devani wrote in a note to clients.

The plunge marked the fourth consecutive quarter of declines, and was larger than the 1.6% drop recorded in the United States, which is widely seen as ground zero for the recession.

Many analysts contend the European economy is too reliant on exports and that its leaders have been slower than their U.S. counterparts in responding to the crisis with government spending.

Additionally, the recent rise of the euro against the dollar has exacerbated concerns from businesses across the region, as a more expensive currency makes European exports less competitive in the international marketplace.

Germany, the euro zone’s biggest economy, saw GDP fall by 3.8% - its biggest economic plunge since at least 1970, when West Germany started to compile records - as demand for its cars and factory machinery imploded.

French GDP slid by 1.2% compared to the previous quarter, officials said, while Italian GDP fell 2.4%, the sharpest fall since 1980. GDP reports for Czechoslovakia and Hungary showed the biggest drops since records began.

The United Kingdom, which is not a member of the Eurozone but is heavily dependent on its neighbors for trade, reported on April 24 that first-quarter GDP contracted 1.9% from the previous quarter, the biggest drop since 1979.

While the data is subject to heavy revision the overall picture from the first quarter is that GDP was severely down worldwide, but that mainland Europe is somewhat worse off than others.

The global economy is expected to contract 1.9% worldwide in 2009, according to the International Monetary Fund, which projects U.S. GDP dropping 2.8%, Euro-zone GDP -4.2%, Japanese GDP -6.2% and British GDP -4.1%, alongside a slowing in China to 6.5% percent growth from 9% last year, Reuters reported.

Still, governments around the continent are hopeful that unprecedented interest rate reductions by central banks, increases in government spending and huge injections of capital to prop up troubled banks will mean that the first quarter marked the low point of the recession.

“Although we are nowhere near the peak in unemployment, we can safely assume that the first quarter was the worst in terms of the pace of decline,” Martin van Vliet, an economist at ING bank, told Reuters.

“The latest ugly GDP figures should… mark the trough of the current ‘Great Recession’,” Alexander Koch, an economist at UniCredit bank, also told Reuters.

Subscribe by RSS Subscribe by Email