German, French economies contract in fourth quarter

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By Annika Breidthardt and Vicky Buffery | February 14, 2013 6:56 PM EST

Europe's two largest economies, Germany and France, both shrunk markedly in the last three months of 2012, suggesting the euro zone has slipped deeper into recession and throwing a first quarter recovery for the bloc into doubt.

The German economy contracted by 0.6 percent on the quarter, official data showed on Thursday, marking its worst performance since the global financial crisis was raging in 2009.

France's 0.3 percent fall was also a touch worse than expectations.

Worryingly for Berlin, it was export performance -- the motor of its economy -- that did most of the damage.

"In the final quarter of 2012 exports of goods declined significantly more than imports of goods," the German Statistics Office said in a statement.

Back revisions to the French figures showed its output fell by 0.1 percent in each of the first and second quarters of 2012, meaning the country has already experienced one bout of recession in the last twelve months.

While the European Central Bank's pledge to do whatever it takes to save the euro has taken the heat out of the bloc's debt crisis, even its stronger members are gripped by an economic malaise that could push debt-cutting drives off track.

French Prime Minister Jean-Marc Ayrault acknowledged for the first time on Wednesday that weak growth was putting his government's deficit goal for 2013 out of reach.

Figures for the whole euro zone are due at 1000 GMT and forecast to show a 0.4 percent fall on the quarter, pushing it deeper into recession.

Economists say it may also shrink in the first quarter of 2013 although resilient Germany is expected to bounce back.

"The chances that the (German) economy will return to growth at the beginning of this year are very good. The early indicators are all pointing upwards," said Andreas Rees, chief German economist at Unicredit.

"The question is how strong the first quarter will be. We expect growth of 0.3 percent but it could be more."

WEAK PERIPHERY

For the more embattled members of the currency bloc, matters are of course worse.

Spain, the euro zone's fourth largest economy, released figures two weeks ago which showed it remained deep in recession after a 0.7 percent contraction in the fourth quarter.

Madrid is pressing on with harsh austerity measures to cut its debt but may be given more time to meet its deficit targets by the European Commission if its economy worsens further.

There are signs that countries like Spain are starting to benefit from harsh internal devaluations -- marked by wage falls and job losses -- in terms of international competitiveness.

The ECB predicts the euro zone will pick up more markedly later in the year although its currency, if it keeps strengthening, could quickly snuff out hard-won competitive advantages for its high debt members.

More recent data for January have already suggested some upturn in the first months of 2013, in the bloc's stronger members at least, and if improvement comes it is likely to be seen in Germany first.

"The debt crisis has ebbed significantly and the global economy has turned up," said Joerg Kraemer at Commerzbank. "Therefore all the important early indicators for Germany are pointing upwards. I expect noticeable economic growth again in the first quarter."

The pain is not confined to Europe. Japan, under some pressure over its aggressive monetary and fiscal policies which are driving down the yen, came up with an unwanted riposte earlier on Thursday -- its GDP shrank 0.1 percent in the fourth quarter, leaving it in recession and crushing expectations of a modest return to growth.

(Writing by Mike Peacock/editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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