Euro Zone Officially In Recession

The 15-nation region that uses the euro has met the technical definition, contracting in consecutive quarters for the first time in its brief history.

Government data confirmed what observers were hoping might, by some fortuitous circumstance, be avoided on Friday: the euro zone has officially entered its first-ever recession. The rub is that the contraction is expected to intensify in the near term.

Gross domestic product for the 15 nations that use the euro shrank by 0.2% in the third quarter, mirroring the 0.2% negative growth booked in the second quarter, technically putting the region into recession. The data come ahead of a G20 meeting in Washington, in which leaders of advanced nations will meet with their emerging market counterparts to discuss ways to stem the global financial crisis.

European heads of state are now scrambling to keep their economies from sliding even more steeply. Global Insight economist Howard Archer said the latest data and survey evidence indicated that the euro zone would probably see a sharper fall in GDP in the current quarter than in the third quarter. He added that "it will take time for sharply lower oil prices, the retreat of the euro, lower interest rates and fiscal stimulus in a number of countries to generate recovery."

Other economic data out from Europe on Friday showed that Italy had joined Germany in entering recession, while Spain's output had contracted and the Netherlands' was stagnating. One surprise was that France had managed to post a slight uptick in growth in the latest quarter, escaping a technical recession by a sliver. (See "Recession Misses France, Hits Italy.")

The weak data lend support to the view that the European Central Bank will cut interest rates further, after having trimmed by 50 basis points last Thursday, to take them to a two-year low of 3.25%. Many economists expect the central bank to cut by another 50 basis points in December and to ease to 2.0% by the end of the second quarter of 2009.

Europe's leading shares were in positive territory in late morning trading on Friday, tracking a strong rally on Wall Street Thursday and higher trading in Asia. But the euro fell against the dollar, buying $1.269, down from $1.2784 late Thursday in New York.

The most popular European government bond, the German bund, was being ditched by traders in droves on Friday. Yields on all major classes of debt securities, which move inversely with their prices, were moving higher. The two-year bund yielded 2.29%, up from 2.26% on Thursday, while the 10-year yielded 3.75%, up from 3.71%.