Euro Zone Sees Biggest Contraction on Record

The euro zone economy saw its deepest contraction on record in the fourth quarter of 2008, data showed on Friday, boosting pressure on the European Central Bank to cut interest rates by 50 basis points in three weeks.

Gross domestic product in the 15 countries using the euro in the last three months of 2008 shrank 1.5 percent against the previous quarter for a 1.2 percent fall year-on-year, the European Union statistics office Eurostat said on Friday.

"Now it's official: the euro zone economy is in its deepest recession since the end of the Second World War," said Christoph Weil, economist at Commerzbank.

Armando Franca / AP Flags of member states of the European Union.

"The collapse of exports and a sharp fall in investments were most probably the main reasons for the slump," he said.

Economists polled by Reuters had expected a 1.3 percent quarterly drop after 0.2 percent contractions in the second and third quarters, and a 1.1 percent year-on-year decline.

"This Friday the 13th is living up to its name. Eurostat has just released 'scary' GDP numbers," said Martin van Vliet, economist at ING.

"The best we can hope is that the fourth quarter marked the worst quarter in terms of the pace of contraction," he said.

Economists said the numbers pointed to a euro zone GDP contraction in 2009 of 2-3 percent.

The mid-point of ECB growth forecasts for this year is a contraction of 0.5 percent, with a -1.0 to 0.0 range, but it will release new forecasts on March 5.

"The radical downward revision to the (ECB) staff projections will open the door to a further cut in interest rates on 5 March: 50 basis points remains our forecast," said Ken Wattret, economist at BNP Paribas.

Eurostat said that in the whole of 2008, the euro zone grew 0.7 percent against 2007, when it expanded 2.6 percent.

The 2008 outcome is worse than the Jan. 19 estimate from the European Commission, which put last year's growth at 0.9 percent.

The shrinking euro zone output of goods and services was led by a record weak performance from the bloc's biggest economy, Germany, as well as deeper-than-expected falls in output in France and Italy.

Germany shrank 2.1 percent quarterly in the fourth quarter, France fell 1.2 percent and Italy produced 1.8 percent less in goods and services than in the previous three months. Spain shrank by 1 percent.

The quarterly economic decline in the euro zone was bigger than in the United States, where the economy contracted 1 percent quarter-on-quarter in the last three months of 2008.

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