Euro Area Double-Dip Recession Fears Grow

Fears of a double-dip recession in the embattled euro zone are expected to be stoked by negative growth figures for the euro area on Wednesday.

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Most economists expect quarterly GDP (gross domestic product) figures released at 10am GMT to show that the euro zone’s economy contracted in the last quarter of 2011. In recent months, many have moved from wondering whether the euro zone will enter recession this year, to discussing when and how severe the recession will be.

The figures “will likely serve as a reminder that the euro area is re-entering recession,” analysts at Deutsche Bank wrote in a research note. They predict that the euro zone economy will have shrunk by 0.4 percent in the last quarter of 2011. This compares to 5.5 percent overall during the 2008-09 recession, which lasted for six quarters. Analysts polled by Reuters thought that GDP shrank by 0.3 percent in the quarter on average.

To enter recession, the euro zone has to have two successive quarters of negative growth. Since the euro zone debt crisis intensified last summer, a growing number of economists have predicted a recession in the region this year.

“The 2009-2011 recovery will have been the shortest euro economic recovery since the cycle between the 1980-82 Volker 'double-dip,’” the Deutsche Bank analysts wrote.

“The expectation is that euro area GDP growth in 2012 will be marked by a divergence between internal and external demand, with the latter supported by a robust global economy and the weaker currency, but the former challenged by the combination of fiscal retrenchment and bank deleveraging.”

Tuesday’s industrial outputfigures showed that output at factories fell by 1.1 percent at the end of 2011, with particularly severe falls in the region’s powerhouse Germany, at the same time as retail sales fell unexpectedly.

Individual euro zone economies including Germany and France, the region’s two largest economies, are also reporting individual GDP figures.

Joblessness recently hit a euro-era high of 10.4 percent, and inflation remains close to 3 percent – indicating that euro zone households are increasingly stretched.

If more signs that the euro zone has begun its second recession within three years emerge, the burgeoning stock market rally, which began in the wake of the European Central Bankinjecting cheap borrowing into the European banking system through December’s long-term refinancing operation, could falter.

“These GDP reports should dowse nascent equity market rallies and put downward pressure on the euro ,” Carl Weinberg, chief economist at High Frequency Economics wrote in a research note.

He added that “safe” bonds could rally following the news.