Europe hit by economic slowdown

European economies contracted in the fourth quarter of last year, with some countries registering the worst figures in decades, official data shows.

The eurozone economy shrank by 1.5% in the previous quarter and 1.2% on the year, Eurostat said.

Germany's economy shrank by 2.1% compared with the previous quarter, its worst quarterly performance since 1990.

France shrank by 1.2%, initial data shows, while Italy registered a drop of 1.8%, the steepest drop since 1980.

The data puts pressure on the European Central Bank to cut interest rates.

In the whole of 2008, the economy in the 15 countries using the euro grew by 0.7% against the previous year, Eurostat said. Slovakia joined the eurozone on 1 January 2009, making it a 16-country club.

The Dutch economy shrank 0.9% during the quarter while the Austrian economy eased by 0.2%, the first drop in nearly eight years. In the same quarter, Portugal's economy contracted by 2% on the previous quarter and 2.1% on the previous year.

"These are huge contractions in Europe, the largest in living memory in most cases," said Ken Wattret, economist at BNP Paribas.

Companies have cut investment and exports have dropped as the global recession has taken hold.

European companies hit by the slowdown include Air-France KLM, which reported a third-quarter operating loss on Friday, and Michelin, whose final-year profits fell as the crisis in the global car industry took its toll on the tyre maker.

The decline in demand for cars was further highlighted by data released on Friday.

The number of new cars sold in Europe in January was down 27% compared with January 2008, the European carmakers' association, Acea, said.

German gloom

The slowdown was the most dramatic in Germany, which registered the biggest fall since German reunification in 1990.

The 2.1% contraction was the third consecutive quarterly drop in Europe's biggest economy, according to the initial data from the Federal Statistics Office, worse than the 1.8% anticipated by analysts.

Year-on-year, the German economy shrank by 1.6%, after growing by 1.4% in the third quarter.

Many are now gloomy about the prospects for 2009.

"This shows things went downhill sharply at the end of the year," said Juergen Michels, an economist at Citigroup. "We'll likely head down again the first and second quarter."

"This number makes it plain that we're in a very serious recession - the most serious since World War Two. It's no surprise that exports and investment have tumbled," said Dirk Schumacher at Goldman Sachs, adding that the rise in inventories did not bode well for the first quarter.

The situation "can hardly get worse," said Carsten Brzeski at ING Financial Markets.

"The German industrial production has run out of steam with companies working only off their backlogs. Foreign demand has plummeted over the last months," he added.

Last month, the German government forecast that the economy would shrink by 2.25% this year.

France slowdown

The slowdown in the French economy was slightly worse than analyst expectations of a 1.1% drop.

ahead

The French economy expanded slightly in the third quarter, by 0.1%, which means that France has not officially entered a recession - which is defined as two consecutive quarters of contraction.

With consumer spending up by 0.5%, some analysts found cause for hope.

"Consumer spending has held up quite well so you can say there is still money out there to be spent and French households are spending it," Alexander Law, chief economist at Xerfi said.

Companies also reduced their inventories in the fourth quarter, shaving 0.9% off gross domestic product, a fact that could bode well for industrial production in the first quarter. With warehouses emptier, companies may increase production.

Many say that tough times lie ahead. "The first quarter will be difficult," Christine Lagarde, France's economy minister, said. "We will have a difficult year. "

The data increases pressure on the European Central Bank to cut rates. The bank cut the benchmark rate to 2% in January, the lowest in the bank's 10-year history and kept the rate unchanged in February. Its next decision is due on 5 March.