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Eurozone shrinks sharply as major nations all suffer

BRUSSELS (Reuters) - The euro zone suffered its deepest contraction on record in the last quarter of 2008 with top economies of Germany, France and Italy all faring badly, depressing the euro on expectations of more ECB rate cuts.

Gross domestic product in the 15 countries then using the euro shrank 1.5 percent from the previous quarter, worse than forecasts for a 1.3 percent drop, statistics office Eurostat said on Friday.

“Now it’s official: the euro zone economy is in its deepest recession since the end of the Second World War,” said Christoph Weil, economist at Commerzbank.

The euro fell around a cent from intraday highs to below $1.2850 after the data boosted expectations the European Central Bank would cut interest rates by half a percentage point in three weeks to a record low 1.5 percent.

It also provided a gloomy backdrop to a meeting of finance ministers and central bankers from the Group of Seven leading economies on Friday in Rome devoted to an effective response to the worst financial and economic crisis since World War Two.

European shares were up two percent, drawing strength from a U.S. plan to subsidise mortgage payments for troubled home owners. The U.S. Congress is also expected to pass a $789 billion (547.9 billion pound) economic stimulus package later on Friday.

Some investors have seized upon glimmers of hope from January activity surveys, suggesting that the last part of 2008 may prove to have been the worst for the world’s top economies as massive government pump-priming takes effect.

“If we can draw any comfort it is that this is probably as bad as it is going to get,” said Nick Kounis, Chief European Economist at Fortis Bank.

“We think the fourth quarter will prove to be the deepest point in the recession and although GDP will continue to contract during the first half of this year, the pace of contraction should get successively less, with the economy eventually returning to very modest growth rates in the second half of the year,” he said.

Europe’s biggest economy, Germany, shrank a bigger-than-expected 2.1 percent quarter-on-quarter, its worst quarterly performance since reunification in 1990.

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French GDP fell 1.2 percent quarter-on-quarter, shrinking at its fastest pace in 34 years. Economists had predicted a drop of 1.1 percent.

Italy provided no respite -- its economy declined by 1.8 percent on the quarter, significantly worse than forecasts for a 1.2 percent slide and the biggest drop since at least the start of the data series in 1980.

“The fourth quarter’s slump provides a terrible carry-over for 2009. Our base case is for euro zone real GDP to drop by 2.3 percent this year as a whole, with the balance of risks skewed to an even weaker outcome,” said Martin van Vliet of ING Bank.

Dutch GDP shrank 0.9 percent on the quarter, the Austrian economy sagged by 0.2 percent, the first fall in nearly eight years. Portugal’s economy declined 2.0 percent while Spain saw its economy shrink by 1.0 percent, its fastest pace in 15 years.

FRIDAY 13TH

Germany, Spain, Italy, the Netherlands and Portugal and euro zone outsider Britain are now in recession, as are the United States and Japan. The U.S. economy, however, contracted less in the fourth quarter than the euro zone -- 1.0 percent.

France has managed to stay out of the clutches of recession thanks to the 0.1 percent growth quarter in July-September.

“This is really Friday the 13th,” said Carsten Brzeski at ING Financial Markets of the German figures.

“The only positive note ... is that a horrible fourth quarter can now finally be filed away. It can hardly get worse. However, the new year has not started well,” he said.

“A recovery in the truest sense of the word will only materialise in 2010.”

Economists said the fourth quarter slump in the euro zone was a result of plunging exports and investment as well as weakening consumer demand.

Government officials have already said further contraction is likely in the first quarter of 2009 and French Economy Minister Christine Lagarde said she expected a tough 2009 but took heart from the fact that household consumption, a key driver of French growth, rose 0.5 percent.

“We will have a difficult year ... I think growth will be lower than -1 percent,” Lagarde told RTL radio.

Writing by Mike Peacock and Jan Strupczewski; editing by Stephen Nisbet

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