Euro economy shrinks, is recession next?

The leaders of Estonia, Denmark, Germany and the Netherlands met this week in Berlin for an informal meeting on the eurozone debt crisis. Official data released Wednesday showed the region?s economy took a step towards recession.

NEW YORK (CNNMoney) -- The eurozone economy shrank in the fourth quarter of 2011, but pockets of strength from France and Germany offset some of the contraction.

Gross domestic product for the 17 nations that use the euro currency fell 0.3% in the fourth quarter from the previous quarter, according to initial estimates released Wednesday by Eurostat, the European Union statistics office.

It was the first decline since the second quarter of 2009 and followed a 0.1% increase in the third quarter of 2011.

The eurozone economy is widely expected to suffer a mild recession this year as the region's debt crisis and planned austerity reforms take their toll.

But the downturn in the fourth quarter was slightly better than the 0.4% decline many economists had forecast, raising hopes that the eurozone will avoid a deep recession.

"Looking ahead, a milder recession seems more likely but we remain cautious about the near-term outlook," said Stella Wang, an economist at Nomura Securities in London, in a note to clients.

The overall GDP number was supported by better-than-expected performance in France and Germany.

Greek economy stuck in a rut

The French economy, which was expected to have contracted, grew 0.2% in the quarter. Germany's economy only shrank 0.2%, after growing 0.6% in the third quarter.

But the data also highlighted the fragile state of many troubled eurozone economies, with Italy and the Netherlands both slipping into recession.

Italy's economy shrank 0.7% in the quarter, after a 0.2% decline in the third quarter. Dutch GDP also fell 0.7%, following a 0.4% drop in the third quarter.

The recession in Portugal intensified, with economic growth falling 1.3% in the fourth quarter.

Spain's economy shrank 0.3% in the fourth quarter after stagnating in the third quarter.

On Tuesday, the Greek government said GDP fell 7% in the fourth quarter, compared with a 5% drop in the third quarter.

Greece, which has been in recession for years, is struggling to secure a second bailout from the European Union, European Central Bank and International Monetary Fund. The government needs to meet tough new conditions to qualify for the money, which it needs to avoid a potentially messy default in March.

5 ways to transform Greece's economy now

Meanwhile, some economists said the weak GDP numbers could prompt the ECB to cut interest rates further to help revive growth.

Howard Archer, chief European economist at IHS Global Insight, expects the ECB to lower its main lending rate to 0.75% from 1% some time in the second quarter.

"Despite some recent improved eurozone surveys and evidence that Germany is returning to growth, we doubt that the eurozone will be able to avoid further contraction," said Archer.

In a research note, Archer said the eurozone economy will remain hobbled by tight credit conditions, austere fiscal policies, high unemployment and the weak global economy.

At the same time, the ongoing debt crisis will continue to weigh on business and consumer confidence in Europe and hold back business investment, he added.