FRANKFURT—The euro-zone economy plunged last quarter at its fastest pace in nearly four years, as weakening global activity and deep recessions along the currency zone's southern border gripped powerhouses such as Germany and France.
The report on gross domestic product from the European Union's statistics office highlights a key risk for the currency bloc as Europe's debt crisis enters its fourth year. Financial market conditions have improved markedly since last summer, due in large part to the European Central Bank's pledge to do "whatever it takes" to preserve the euro. But these gains haven't translated into new business activity.
Without growing economies, Spain and Italy will likely see government-debt burdens increase even as they undertake austerity measures such as higher taxes and reduced spending. That could revive doubts in financial markets about the sustainability of their finances.
GDP in the euro zone fell 0.6% in the fourth quarter compared with the third, according to the Eurostat report. Economists had expected a 0.4% drop. It was the third straight GDP decline and fifth straight quarter in which the currency bloc failed to expand. For 2012 as a whole, GDP fell 0.5% from the prior year.
GDP in Germany, Europe's largest economy, fell 0.6% from the previous quarter on declining exports and investment. France, the bloc's second biggest, declined 0.3%. Other large economies including Italy, Spain and the Netherlands contracted.
Italy's GDP plummeted 0.9% from the previous quarter, a much sharper rate of decline than the third quarter. Spain's downturn also deepened. Portugal's GDP slid 1.8% in the final three months of 2012, double the third quarter's rate of decline.
ECB officials expect the euro zone to embark on a gradual recovery later in 2013. But the source of that rebound remains elusive. Record-high unemployment in the euro zone has weighed on consumer spending, while fiscal austerity measures are expected to weaken state spending and employment in many euro countries this year. Borrowing costs for small businesses remain elevated in Spain and Italy.
In Germany, where unemployment is much lower than other parts of the region, the economy appears to be bouncing back quickly with business surveys signaling a return to growth this quarter, aided in part by stronger exports to Asia. Weakness in late 2012 "is likely to be a springboard for a small V-shaped rebound" as soon as this quarter, said Berenberg Bank economist Christian Schulz.
But surveys of purchasing managers and other business leaders suggest France continues to contract this quarter. French industry has lost global competitiveness in recent years as its labor costs rose, economists say. A raft of tax increases imposed by President François Hollande is adding to the headwinds facing the economy.
The French government is preparing to at least halve its 0.8% GDP growth forecast for this year, officials familiar with the matter told The Wall Street Journal earlier this month. The smaller size of the economy and fall in tax receipts is also derailing government plans to cut the budget deficit to 3% of GDP this year.
"In order to maintain its position at the epicenter of the euro area in economic terms, France has a lot of work to do," said analysts at J.P. Morgan JPM -0.94% in a research note.
