EU Economy Contracts 1.5% in Fourth Quarter, Interest Rates Could be Next

By Mike Caggeso
Associate Editor
Money Morning

Europe's gross domestic product (GDP) shrunk 1.5% in the fourth quarter, its biggest decline in the European Union's 13-year history.

The contraction was higher than the 1.3% fall economist expected. And while it marked the third straight quarterly decline, grim forecasts from the Eurozone's top economies suggest the EU's recession is deepening.

Germany and France, the two largest Eurozone economies, posted their biggest economic contractions (-2.1% and -1.2%, respectively) in more than two decades.

A host of other countries posted fourth-quarter declines: Spain (-1.0%), Italy (-1.8%), Austria (0-2.%), the Netherlands (-0.9%), Portugal (-2.0%) and the Czech Republic (-0.6%).

Only three countries posted positive GDP growth: Cyprus (0.6%), Greece (0.2%) and Slovakia (2.1%), according to Eurostat, the EU's statistics office.

The United Kingdom, not an EU member but the block's biggest trading partner, shrank 1.5% for the quarter.

For the year, EU GDP grew by 0.7%.

"The news is dire," Kenneth Wattret, senior economist at BNP Paribas SA in London, told Bloomberg. "Compared to the early 1990s recession, which was painful, this is twice as big."

More Rate Cuts?

The European Central Bank meets next month, and all eyes are on European Central Bank President Jean-Claude Trichet.

Last month, he said in a CNN interview that he isn't ruling out additional rate cuts. In January, the ECB lowered its primary lending rate to 2.0%, its all-time low. But the ECB also has plenty of room for more cuts, compared with the 0.0% to 0.25% range set by the U.S. Federal Reserve.

"We don't exclude anything. We don't exclude non-standard practices," Trichet said in the interview. Given the suffocating economic conditions, "we are taking risks we've never taken before."

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