Europe's recession deepens as exports suffer

eurozone gdp
Hungary's economy shrank 0.9% in the fourth quarter as the eurozone recession deepened.

The eurozone suffered its third consecutive quarter of decline at the end of 2012 as exports from leading economies Germany and France sank, deepening a regional recession that has driven unemployment to record highs.

Gross domestic product in the 17-nation euro area fell by 0.6% in the fourth quarter, leaving the eurozone economy 0.5% smaller than it was at the start of the year. The region saw a contraction of 0.1% in the third quarter.

The European Central Bank and many economists are predicting a recovery later this year. But overall output is still likely to shrink for a second year running, according to the latest forecast from the International Monetary Fund.

The figures were worse than analysts were expecting and the euro fell to a three-week low against the dollar, although it is still up 5% over the past three months. European stocks were also weaker.

Performances in all four of the region's biggest economies -- Germany, France, Italy and Spain -- deteriorated compared to the third quarter of 2012.

Germany, which accounts for about 30% of eurozone GDP, suffered a contraction of 0.6% and France's economy shrank by 0.3%. Both economies had eked out modest growth in the previous quarter.

"The decline of the gross domestic product at the end of 2012 was mainly due to the comparably weak German foreign trade: in the final quarter of 2012, exports of goods went down much more than imports of goods," the German statistics office said in a statement.

Related: Europe's central banks stand firm on policy

French data showed the region's second biggest economy flat-lining over the year as a whole. France also suffered a sharp fall in exports in the fourth quarter, down 0.6% after growth of 0.7% in the third.

Weaker growth will make it harder for eurozone governments to meet their debt-cutting targets and intensify the debate about the impact of a strong euro on the region's recovery prospects.

With fiscal policy tightening, and the ECB in a holding pattern, exports offer one of the few opportunities for the recession-ravaged region to return to growth. A stronger euro threatens to cancel out some of the hard-won gains in competitiveness brought about by wage cuts in indebted European states.

Related: Europe's next challenge: A strong euro

Many of the 17 eurozone nations are in the middle of austerity programs that are reducing demand, and prompting households and businesses to defer spending and investment.

While policymakers have signaled a willingness to give states more time to bring their budget deficits into line with European Union targets, if the economy continues to deteriorate, there is no sign of a major change in approach.

In the longer term, EU leaders are hoping efforts to remove trade barriers with the U.S. could provide a shot in the arm for growth. Both sides said this week they wanted to move quickly to start formal talks on a trans-Atlantic free trade agreement.

Related: Europe eyes growth windfall from U.S. trade pact

The wider EU economy of 27 states went into reverse in the fourth quarter, shrinking by 0.5%. The U.K. contracted by 0.3% in the fourth quarter of 2012, bringing it to the brink of a third recession in five years.

The Bank of England trimmed its forecasts for U.K. growth in 2013 Wednesday while raising them for inflation.

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