Euro zone economy shrinks in worst decline

BRUSSELS (Reuters) - The euro zone’s economy shrank more in annual terms in the first quarter than previously thought, with its worst ever contraction resulting from plunging corporate investment and exports, data showed on Wednesday.

The gross domestic product of the 16 countries using the euro fell 4.8 percent year-on-year in January to March, the worst decline on record, the European Union’s statistics office said. It had previously estimated the drop at 4.6 percent.

Eurostat said output shrank 2.5 percent quarter-on-quarter, in line with its previous reading issued on May 15.

Separately, Eurostat said prices at euro zone factory gates logged their biggest annual fall on record in April, pointing to negative inflation in coming months and more monetary easing from the European Central Bank.

Producer prices fell 1.0 percent month-on-month and 4.6 percent annually, the biggest drop since EU measurements started in 1996 and more than expected by economists. A dip in energy drove the decline.

On the economy in the first quarter, Eurostat said the worst recession since World War Two came on the back of nose-diving investment and exports while domestic consumption and government expenditure fared much better.

Household consumption fell 0.5 percent quarter-on-quarter and 1.1 percent annually while government expenditure was flat and up 1.7 percent respectively.

Gross fixed capital formation, a measure of investment, declined 4.2 percent on a quarterly basis and 10.4 percent year-on-year. Exports fell 8.1 percent and 15.5 percent respectively.

Economists say the first quarter was the worst of the recession, but ECB Governing Council member Ewald Nowotny was quoted as saying on Wednesday the bank’s new staff forecasts would show a sharp contraction this year and growth around zero in 2010.

Eurostat confirmed that Europe’s biggest economy, Germany, led the plunge in the first quarter with a 3.8 percent quarterly fall and a 6.9 percent annual drop.

France, Europe’s second-biggest economy, had a fall of 1.2 percent on the quarter and Italy, the next biggest economy, had a drop of 2.4 percent.

In the wider 27-nation European Union, GDP shrank by 2.4 percent quarter-on-quarter and 4.5 percent annually as non-euro country Poland posted modest growth.

Economies in the Baltic republics, worst hit by the crisis, contracted by 18.6 percent year-on-year in the case of Latvia, 15.6 percent in Estonia and 11.8 percent in Lithuania.

The data could prompt the ECB to consider more monetary easing, although more analysts believe the bank reached the end of the easing cycle after it cut rates to 1 percent in May.

Producer prices show inflationary pressures early in the pipeline as their moves are usually reflected later in consumer prices, which the ECB wants to grow by just under 2 percent year-on-year.

Editing by Dale Hudson