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Euro zone worse than thought

THE euro zone economy had its deepest contraction on record in last year's fourth quarter, according to data released yesterday, increasing pressure on the European Central Bank to cut interest rates by 50 basis points in three weeks time.

Gross domestic product in the 15 countries using the euro in the last three months of 2008 shrank 1.5 percent against the previous quarter and 1.2 percent against the same period in 2007, the European Union statistics office Eurostat said.

"Now it's official: the euro zone economy is in its deepest recession since the end of the Second World War," said Christoph Weil, economist at Commerzbank.

"The collapse of exports and a sharp fall in investments were most probably the main reasons for the slump."

Economists polled by Reuters had expected a 1.3-percent quarterly drop after 0.2 percent contractions in the second and third quarters, and a 1.1-percent year-on-year decline.

"This Friday the 13th is living up to its name. Eurostat has just released scary GDP numbers," said Martin van Vliet, economist at ING. "The best we can hope is that the fourth quarter marked the worst quarter in terms of the pace of contraction."

Economists said that the figures indicated that the total euro zone GDP will contract 2 percent to 3 percent this year. The mid-point of ECB growth forecasts for this year is a contraction of 0.5 percent, but it will release new forecasts on March 5.

Interest rate cuts

"The radical downward revision to the (ECB) projections will open the door to a further cut in interest rates on March 5: 50 basis points remains our forecast," said Ken Wattret, economist at BNP Paribas.

Eurostat said that the euro zone economy grew 0.7 percent last year, compared with 2.6 percent in 2007. The 2008 outcome is worse than the January estimate from the European Commission, which put last year's growth at 0.9 percent.

The shrinking euro zone output of goods and services was led by a record weak performance from the bloc's biggest economy, Germany, as well as deeper-than-expected falls in output in France and Italy.

The quarterly economic decline in the euro zone was bigger than in the United States, which contracted 1 percent against the previous quarter.


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