High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/bc55e40a-767c-11e2-ac91-00144feabdc0.html#ixzz2KsIEfaVK Europe’s brittle economies shrank at their fastest rate since the collapse of Lehman Brothers four years ago, official data for the fourth quarter of 2012 showed on Thursday, with both strong and weak countries falling short of expectations. News of the eurozone’s 0.6 per cent quarter-on-quarter drop, deepening the bloc’s recession, and the woeful country-specific performances hit the euro, which fell 1 per cent against the dollar. The single currency’s recent strong appreciation has fuelled fears that a nascent recovery for the bloc may be dead in the water. High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/bc55e40a-767c-11e2-ac91-00144feabdc0.html#ixzz2KsIGCZ8B Consensus forecasts had expected a 0.4 per cent contraction in gross domestic product for the eurozone in the final quarter of 2012. However, fears among businesses at the end of last year about the sovereign debt crisis and the combined weight of mass unemployment and austerity in many countries hit output. Germany and France, the eurozone’s two biggest economies, both saw output shrink. German GDP shrank 0.6 per cent in the period while France contracted 0.3 per cent compared with the previous three months. Both were marginally worse than the consensus forecasts of 0.5 per cent and 0.2 per cent respectively. Italy’s economy shrank 0.9 per cent, also more than expected, and its sixth consecutive fall. Both Dutch and Austrian GDP also contracted. The figure for the wider EU – all 27 member states – was a fall of 0.5 per cent. The steep German decline reflected a sharp drop in net exports and investment in plants and machinery. Although business surveys have been much more upbeat, the weakness underscores how the recent appreciation of the euro could threaten an export-led recovery. The news tipped European markets into the red, with riskier stocks leading a widespread sell-off. By midday the FTSE Eurofirst 300 had fallen 0.5 per cent, while Germany’s benchmark index was down by as much 1.2 per cent. The French CAC 40 was down 0.8 per cent, led by Société Générale and Crédit Agricole. “The country breakdown underlined the breadth of the weakness across the region,� Jonathan Loynes, chief economist at Capital Economics said. “While the southern economies not surprisingly suffered the deepest quarterly, both Germany and France saw bigger than expected contractions of 0.6 per cent and 0.3 per cent respectively.� Spain’s Ibex 35 fell 1.7 per cent while Italy’s FTSE MIB was down 1.1 per cent. Thursday’s data will raise pressure on the European Central Bank should its forecast for a gradual recovery in the second half of the year be seen as unrealistic. It has said it does not target the exchange rate but has hinted at action by commenting that the euro’s strength represents a downside risk to its inflation outlook. “We remain of the view that the ECB will attempt to counter this [euro] strength,� Nick Kounis, economist at ABN Amro, said in a note. “Verbal intervention has already begun but if that does not work, interest rate cuts will come back on to the table.� The contraction in Germany is, however, widely expected to be shortlived. “The fourth quarter was so poor primarily because businesses were unsettled by the sovereign debt crisis and invested significantly less,� said Jörg Krämer, economist at Commerzbank. “Furthermore, they were unable to export as much due to the weak global economy in the fourth quarter.� By contrast, rising unemployment in France and the likelihood it will need more austerity to comply with fiscal targets make its route to recovery less certain, economists said. Insee, France’s national statistics agency, said manufacturing output fell 2.3 per cent in the fourth quarter after a 0.9 per cent rise in the third quarter. “Apart from the food industry, all major (manufacturing) branches contributed to this big fall, the strongest since the first quarter of 2009,� Insee said. The data follow weaker than expected Japanese GDP figures released earlier on Thursday. Asia’s second-largest economy contracted 0.1 per cent between October and December, or 0.4 per cent on an annualised basis, the third consecutive contraction.

Source