ECB under Pressure to Lower Rates as GDP Contraction is the Largest in over 12 Years

ECB GDP in the 4th Q show large shrinkage

Feb. 13 (Bloomberg) — Europe’s economy contracted the most in at least 13 years in the fourth quarter, compounding pressure on the European Central Bank to reduce interest rates to the lowest ever next month.

Gross domestic product in the euro region declined 1.5 percent from the previous three months, the European Union’s statistics office in Luxembourg said today. That was more than the 1.3 percent economists expected and the most since euro-area GDP records began in 1995. From a year earlier, GDP fell 1.2 percent in the fourth quarter, the only full-year drop on record.

With the first recession in the euro’s 10-year history deepening, companies from carmaker Renault SA to software-maker SAP AG are cutting jobs and scaling back production. Six ECB policy makers, including President Jean-Claude Trichet, have said the central bank may cut rates to a record low from the current 2 percent and consider other measures to stimulate growth.

“The news is dire,” said Kenneth Wattret, senior economist at BNP Paribas SA in London who correctly forecast today’s data. “Compared to the early 1990s recession, which was painful, this is twice as big.”

The economies of both Germany and France, the two largest in the euro region, shrank by the most in more than two decades in the latest quarter. Spain, Italy, the Netherlands and Austria also contracted in the final three months of last year, national statistics offices reported. The U.K. economy, the euro area’s biggest trading partner, shrank 1.5 percent in the quarter.

‘More Radical’

For the euro region, “we see at least another three quarters of contraction, and we should brace for a huge rise in unemployment,” BNP’s Wattret said. “The ECB will cut by at least half a point next month and may have to consider something even more radical.”