| 12.5°C Dublin

Spending fall raises fears of new recession across Europe

THE eurozone seems to have entered its second recession in three years as household spending continues to plummet and companies halt investment as exports and manufacturing contract.

EU Economics Commissioner Olli Rehn admitted yesterday that Europe could be back in recession after new figures confirmed that economic output in the 17 countries sharing the euro shrank 0.3pc in the last three months of 2011 from the third quarter. The area's economy is not expected to grow this quarter either.

Many economists expect an improvement in the second half of 2012, assuming eurozone leaders can agree a big enough financial firewall that could rescue indebted states. Mr Rehn said yesterday that he expected "a turning of the tide" later in the year.

The main reasons for the contraction were a decline in investment -- the sharpest since 2009 -- and a drop in consumer spending.

Households reduced their spending by 0.4pc in the final months of the year, despite Christmas.


"Households will remain under pressure and we don't expect any improvement because fiscal consolidation will deepen and inflation, while falling, remains quite sticky," said Mario Valli, chief eurozone economist at Unicredit.

The growing divergence between the eurozone's prosperous north and poorer south was clear in the last quarter of 2011, when Italy, the eurozone's third largest economy, saw output shrink 0.7pc, while France expanded 0.2pc. The figures do not include growth estimates from smaller member states including Ireland, Greece and Malta, which have yet to publish fourth-quarter data.

The battle between austerity and growth in the 17-nation eurozone was evident in the fourth quarter. Eurozone government expenditure fell 0.2pc, while industry contracted 2pc and imports were down 1.2pc.

ECB President Mario Draghi is expected to keep interest rates on hold, probably judging that the weak economy is offsetting concerns about high oil prices and inflation. (Additional reporting Reuters and Bloomberg)

Irish Independent