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Euro zone economy predicted to show worst slump in four years

Publish Date06/03/2013 06:49:37 AM

Last Update06/03/2013 06:59:29 AM

Euro zone economy predicted to show worst slump in four years

The euro area economy is heading towards its steepest downturn in almost four years, dragged by slumping output in Germany, France and Italy in the fourth quarter of 2012, government data may show on Wednesday.

A preliminary reading of the Gross Domestic Product in the euro area probably tumbled 0.6 percent in the fourth quarter from the previous three months. That is the worst performance since the depths of the recession in 2009.

While uncertainty is still dominating the outlook of the 17-nation currency bloc amid rising unemployment, the European Central Bank warned that "downside" risks remains, signaling the region is not out of the woods yet.

Nonetheless, confidence towards the euro has improved in the past few months and the ECB was somewhat optimistic about the still fragile recovery, suggesting the 17-nation euro economy will pick in the second half of this year.

February data suggested the downturn in business activity has steepened, contrasting a slowing trend which had been evident in the three months to January. But the rate of decline remained less severe than seen in any of the nine months prior to January.

Economists believe the worst of the crisis is over, while the region looks set to see a much smaller drop in GDP in the first quarter compared to unexpected 0.6 percent decline. But the forecast clearly depends on the German and French output.

According to Markit, recent survey signal a worrying divergence between the two nations, while Germany is on track to see the strongest quarterly growth in almost two years, but France is shrinking at the fastest rate for four years until now.

German and Irish growth in business activity is expected to slowly push the single-currency bloc onto the shores of safety by end of the year, although the ECB has forecast that the euro zone`s economy will contract 0.3 percent this year.

Poor GDP data might fuel concern that the ECB will cut the benchmark interest rate, however most still believe tomorrow`s meeting will end with the 0.75 percent rate unchanged, but in the near future, an interest rate cut remains quite an option!

The euro rose slightly for the third day against the dollar following a lousy performance last week. The single currency continued to trade near $1.30 ahead of the ECB meeting while Italy’s political deadlock continued to risk the future of the bloc.


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