November 14, 2012 / 11:04 PM / 7 years ago

Euro zone seen sinking into recession as Germany struggles

BRUSSELS (Reuters) - The euro zone likely slipped into its second recession since 2009 in the July-September period, as the three-year debt crisis slowed economic growth in Germany to a crawl.

File picture shows European Union member states' flags flying in front of the building of the European Parliament in Strasbourg, April 21, 2004. REUTERS/Vincent Kessler/File

Economists expect EU statistics office Eurostat to say on Thursday that the bloc’s output shrank 0.2 percent in the third quarter, as it did in the second quarter.

That would put the 9.4 trillion euro (7.5 trillion pounds) economy, which generates a fifth of global output, officially in recession, although Italy and Spain have been contracting for months and Greece is suffering an outright depression.

“The distress in more vulnerable member states has progressively started to affect the remainder of the (European) Union,” senior European Commission official Marco Buti said in a report this month forecasting a 0.4 percent contraction for the euro zone in all of 2012.

Hopes for a recovery next year are also fading, with the European Commission saying the economy will flatline in 2013.

A rebound in the euro zone could be vital for the rest of the world as the United States and China struggle with the impact of the crisis on their companies’ ability to grow and prosper.

Millions of workers went on strike across Europe on Wednesday to protest the government spending cuts they say are driving the region into a deeper malaise but which Germany and the Commission say are crucial to healing the wounds of a decade-long, credit-fueled boom.

Output from euro zone factories dropped the most in nearly 4 years in September and companies as diverse as telecoms group Ericsson, Ford Motor, steel group Kloeckner and engineering firm Bombardier have announced job cuts.

EU officials say the euro zone is on the right path as labour costs fall and exports begin to rise. The European Central Bank’s promise to buy euro zone government bonds has also drawn foreign investors back into sovereign debt markets.

But after months of resilience, Germany, Europe’s largest economy, is seeing its companies unnerved by the crisis and demand for its goods in the euro zone and abroad is drying up.

While German gross domestic product expanded by 0.5 percent in the first quarter, it slowed to 0.3 percent in the second and economists polled by Reuters see growth weakening further to 0.2 percent in the July-September period.

Spain and Italy will also report GDP figures on Thursday, but it is France, the euro zone’s second-largest economy, that many are watching to see if its economy stagnates or shrinks.

“France in particular is a cause for concern,” said Deutsche Bank in a report. “France’s economy is in the doldrums, with still poor growth prospects and weak export development,” the bank said, pointing to its declining share of world export markets, unprofitable companies and low investment incentives.

Reporting by Robin Emmott

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