Euro zone seen dropping deeper into recession as Germany slips

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February 14, 2013 11:14 AM EST

The euro zone probably slipped deeper into recession in the final quarter of last year as a Chinese slowdown led even the robust German economy to contract, but a modest pick-up may already have begun.

Economists expect the EU statistics office Eurostat to say on Thursday that the bloc's output shrank 0.4 percent in the fourth quarter, after contracting 0.1 percent in the third quarter and 0.2 percent in the second.

Given that the euro zone economy stagnated in the January to March period, the Q4 figures should confirm the bloc recorded its first calendar year with no growth at all.

Germany's economy, Europe's largest, is seen shrinking by 0.5 percent after a 0.2 percent expansion in the third quarter, with French economic output expected to decline by 0.2 percent after an increase of 0.1 percent in Q3.

Spain's economic output fell 0.7 percent over the fourth quarter, its steepest quarterly contraction in a year, as households hit by state spending cuts and stubbornly high unemployment slashed spending.

With austerity measures extending across the bloc, weak domestic demand is likely to have weighed on many euro zone economies and not just those hit hardest by the debt crisis.

However, some relief may be at hand. Factory output picked up in December for the first time since August.

ING economist Carsten Brzeski said it was a close call whether the euro zone would register growth in the first quarter of 2013. ING still forecasts a slight contraction, albeit less pronounced than in the October to December period.

"If in both the euro zone and Germany you stayed at zero for the next three months, you would get some quarter-on-quarter growth. October and November were so horribly bad and you have a little upturn," he said.

"The fourth quarter was probably as bad as it could get."

Germany remains a class apart, with its single quarter of contraction seen more as a temporary blip.

German investor sentiment in January was at its highest since May 2010, while business confidence grew for a third month and consumer morale picked up after two months of falls.

"For Germany, confidence indicators have been strong and it will benefit from stronger numbers from China and a recovery in the United States," Brzeski said.

(Reporting by Philip Blenkinsop)

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