A collapse in exports and a fall in private demand and investment produced the deepest ever quarterly euro zone economic drop in the fourth quarter of 2008, data showed, as the ECB meets on interest rates.
The European Union's statistics office confirmed its earlier estimate that quarter-on-quarter gross domestic product in the euro zone shrank 1.5 percent in October-December after a 0.2 percent drop the previous quarter.
Year-on-year, Eurostat said the contraction was 1.3 percent, deeper than the previously reported 1.2 percent.
"The interesting aspect in the breakdown of the data is falling consumer spending, which is quite significant. This suggests Q1 could be as bad as Q4, 2008," said Luigi Speranza, economist at BNP Paribas.
"We could have … a fall of at least 1 percent in Q1. It means for 2009, we start from a very, very low level. The consensus for growth for the euro zone in 2009 remains on the downside," he said.
The news comes as the European Central Bank meets on interest rates amid strong market expectations it will cut borrowing costs for the 16 countries now using the euro by 50 basis points to 1.5 percent.
The biggest negative contribution to the overall quarterly fall came from net trade, which took away 0.9 percentage point. Tumbling exports subtracted 3.1 percentage points while a hefty fall in imports added 2.2 percentage points.
Household demand took away another 0.5 percentage point and investment 0.6 point. Government spending subtracted 0.1 percentage point.
Apart from imports, the only positive contribution to growth came from inventories, which added 0.6 percentage point.
"The breakdown…shows very worrying extreme weakness across the board. Consumer spending fell very sharply, indicating that rising unemployment and deepening concerns over the economic situation and jobs outweighed the benefit of retreating inflation," said Howard Archer, economist at IHS Global Insight.
"Meanwhile, investment plunged as businesses faced slumping demand, weakening capacity utilization, very tight credit conditions and deteriorating profitability," he said.
"In addition, euro zone exports plummeted as they were dragged down by sharply weakening global economic activity and the lagged impact of the persistently strong euro," he said. Eurostat said that over the whole of 2008, GDP grew by 0.8 percent in the euro area and by 0.9 percent in the European Union of 27 member states, against 2.6 percent growth in the euro zone in 2007 and 2.9 percent in the EU respectively.
In the United States, the economy expanded 1.1 percent last year and contracted by 0.7 percent in Japan.
The ECB will also publish on Thursday its new growth and inflation forecasts. Economists expect a sharp downward revision of its last prediction that euro zone growth will be in the range of -1.0-0.0 percent in 2009.
"I don't think the ECB will go for more of a cut than 50 bps today," said Steve Barrow, economist at Standard Bank.
"I don't think we will see any significant analysis in terms of new ways to try to inject some stimulus and the forecasts themselves will have to adjust pretty dramatically downwards," he said. "The bigger issue with the ECB is what they tell us about the future."
