Euro zone recession confirmed

BRUSSELS (Reuters) - Falling investment and a weaker trade performance made the euro zone economy contract in the third quarter, data showed, confirming the bloc's first recession as the European Central Bank meets to discuss the size of a rate cut.

The European Union's statistics office, Eurostat, confirmed its earlier estimate that the economy of the 15 countries using the euro shrank 0.2 percent quarter-on-quarter in July-September after a 0.2 percent fall in the previous three months.

Eurostat also revised down its previous annual estimate for the third quarter to growth of 0.6 percent from 0.7.

"It's just a prelude to a serious recession as two of the months, July and August, were before the real crisis erupted. We expect a 75 basis point cut from the ECB today," said Holger Schmieding, economist at Bank of America.

In past weeks the ECB has strongly signaled it would cut rates on Thursday, but gave no clues on the size of the move.

Markets expect a cut of at least 50 basis points in its main refinancing rate to 2.75 percent or lower to help avoid a protracted recession as inflation falls rapidly.

Expectations of a deep ECB cut were boosted after Sweden's central bank, the Riksbank, surprised markets with a record rate cut of 175 basis points to 2.0 percent and the central bank of New Zealand cut its rates by 150 bps to 5.0 percent.

The ECB has cut interest rates by a total of one percentage point since early October, to 3.25 percent, in two moves of 50 bps. It wants inflation to be just below 2 percent.

It was thrown off track by a sharp rise in oil and food prices in the 12 months to July, but oil costs have since dropped to a third of their peak that month and consumer inflation fell to 2.1 percent in November from 4.0 in July.

WORSE STILL TO COME AS CRISIS IMPACT YET TO SHOW

Eurostat said investment pulled down the overall quarterly figure by 0.1 percentage point and the contribution from trade was a negative 0.5 percentage point. The contribution from household demand was zero.

The only positive contributions came from government spending -- 0.2 percentage point -- and inventories, which added 0.3 percentage point.

The data gives new urgency to euro zone plans to stimulate the economy through government investment, higher benefits and cheaper credit that would increase household demand at a time when confidence is nearing 15-year lows on unemployment fears.

By sector, the biggest drags on growth were industry and construction, which subtracted 0.2 and 0.1 percentage point respectively. Non-financial services added 0.1 percentage point.

"It seems odds-on that the fourth quarter will see deeper euro zone contraction as the financial crisis increasingly impacts on the real economy," said Howard Archer, economist at Global Insight.

"We expect euro zone GDP to grow by just 1.0 percent overall in 2008 and then to contract by 0.8 percent in 2009 as it is hit by sharply weaker global growth, extended financial sector problems, rising unemployment and very weak business and consumer confidence," he said.

The euro zone third quarter performance was weaker than that of the United States and Japan, which both saw output fall 0.1 percent on the quarter.

Eurostat confirmed that the euro zone's biggest economy, Germany, and the third-biggest, Italy, were in technical recession. The second-biggest, France, escaped a similar fate by a small margin, growing 0.1 percent in the third quarter.

(Reporting by Jan Strupczewski, editing by Dale Hudson/Ruth Pitchford)