Euro-Zone Recession Extends Into 2013

By Brian Blackstone

FRANKFURT—Economic output contracted in the euro zone for a sixth-straight quarter, as a slight recovery in Germany failed to offset recessions in France and Italy.

Gross domestic product fell 0.2% in the first quarter from the final three months of 2012, according to a report Wednesday from the European Union's statistics office Eurostat. GDP fell 0.6% in the fourth quarter. The current downturn has now stretched for longer than the 2008-2009 recession, though the drop in output isn't yet as severe as it was four years ago.

Business surveys for April suggest the bloc's economy will likely decline again this quarter. Euro-zone GDP last expanded during the third quarter of 2011, a time when Germany was growing at rates of 3% or more and recessions were largely limited to small countries such as Greece, Ireland and Portugal.

But Germany, which accounts for nearly one-third of euro-zone output, shows little sign of rebounding quickly this year. Its GDP expanded just 0.1% on a quarterly basis from the fourth quarter, a much weaker gain than economists had expected. Weak investment offset higher levels of consumer spending, Germany's statistics office said, while the harsh winter trimmed construction.

Meanwhile, an economic downturn that started in Greece three years ago has spread to the euro zone's three biggest economies after Germany—France, Italy and Spain—which account for half the bloc's GDP.

French GDP fell 0.2% from the fourth quarter due to drops in consumer spending and exports, its second-straight contraction. Economists in Europe commonly define recession as back-to-back quarterly declines in output. Italy's GDP fell 0.5%, its seventh-straight drop.

Record-low interest rates and abundant liquidity from the European Central Bank have stabilized European debt markets in recent months and led to surging equities. But the ECB's accommodative monetary policies—including an interest-rate cut two weeks ago—have yet to filter through to new spending, investment and hiring, especially in southern Europe.

Economists blame a mix of factors for Europe's malaise, which is expected by many analysts to extend through the end of the year. Small businesses in Spain, Italy and Portugal are hampered by much higher borrowing costs than their German and northern European counterparts. High wages in France and Italy have eroded the competitiveness of their products in global markets, weighing on exports.

The euro bloc's jobless rate is at 12.1%, a record high, draining consumer confidence and spending. That rate masks a deep divergence across the currency bloc. Crisis-torn economies such as Greece and Spain have unemployment rates above 25%. For those under 25 years old, the rate is well above 50%.

In contrast, German unemployment is 5.4%, according to Eurostat, and its youth unemployment rate is less than 8%.

ECB officials continue to expect a recovery to materialize in the second half of this year, aided by faster export growth and low interest rates.

But many economists see that scenario as too optimistic. Instead, fiscal belt-tightening in much of Europe is expected to be a drag on output this year, though not as much as it was in 2012.

Banks in southern Europe may remain reluctant to lend as they shed bad assets from their balance sheets, analysts said, and high household debt will likely keep many consumers from spending more.

Euro-zone economies "face two or three more years of recession and tepid cyclical recovery," Willem Buiter, chief economist at Citi, wrote in a research note last week.WSJ