BRUSSELS The euro zone narrowly escaped technical recession in the first quarter as exports offset a plunge in investment and inventories to produce a flat reading, data showed on Wednesday, but it was unlikely to escape contraction again in the second quarter.
The European Union's Statistics Office confirmed its previous estimate that the 17 countries that share the euro produced the same gross domestic product in January-March as in the previous three months.
But it revised down its previous estimate of the year-on-year GDP growth in the first quarter, to a contraction of 0.1 percent from a flat reading.
"There can be little doubt that the euro zone will suffer renewed, appreciable contraction in the second quarter and prospects for the third quarter hardly look encouraging at the moment," said Howard Archer, economist at IHS Global Insight.
Archer noted that the overall euro zone economic sentiment sank to a 31-month low in June and the purchasing managers' surveys showed combined manufacturing and services activity at a 35-month low in June.
"Furthermore, an overall unemployment rate of 11.0 percent, and rising, highlights the euro zone's woes," he said.
The data comes as the European Central Bank meets to discuss interest rates. Economists expect no policy moves on Wednesday, but possibly an indication of a readiness to cut rates next month, given a weakening economy and Spain's banking troubles.
Euro zone output contracted 0.3 percent in the last quarter of 2011 against the previous three months and, if the economy had shrunk for a second consecutive quarter, the euro zone would be in technical recession.
Eurostat said exports contributed 0.5 percentage points to the final quarterly GDP figure, offsetting falls in investment and inventories, which took away 0.3 percentage points and 0.2 percentage points respectively.
"The euro zone cannot rely on this (exports) going forward given current heightening global growth concerns," Archer said.
Eurostat data showed Spain, the Netherlands, Portugal, Greece, Italy, Cyprus were in recession after two, or more, consecutive quarters of shrinking growth.
Spending by governments in the euro zone, constrained by a drive to shore up public finances, did not make any contribution to GDP growth in the first quarter. Neither did household consumption.
"Tight fiscal policy in many countries, tight credit conditions, high and rising unemployment and muted global growth will continue to weigh down on euro zone growth," Archer said.
The euro zone economy might return to weak growth in the second half of the year but unemployment looks certain to rise past its current 15-year high, according to a Reuters poll last month of 70 economists. It predicted the euro zone economy would shrink by around 0.4 percent this year. <ECILT/EU>
Archer said much depended on whether euro zone leaders could contain the bloc's crisis. "However, we are increasingly leaning towards the view that Greece will end up leaving the euro zone. Consequently, we believe that the downside risks to euro zone GDP are rising appreciably," he said.
(Reporting by Jan Strupczewski; editing by Rex Merrifield/Ruth Pitchford)