The second coming of the recession

European leaders were confronted this week by the ugly prospect of a second recession in three years after figures showed that manufacturing output across the eurozone declined in December for a fifth consecutive month. Italy, Greece and Spain saw the sharpest falls in production in the final month of 2011 as output and new business fell across all areas.

Stock markets in Paris, Frankfurt and Milan rose after the figures proved slightly better than expected in France and Germany, with the German Dax up 3% at 6075 and the Paris Cac up 2% at 3222 earlier this week. But the first economic figures of the new year were widely interpreted as a strong signal that the eurozone is heading into recession. To emphasise the lack of confidence among investors in the prospects for the eurozone, the value of the euro continued its decline against the dollar and the yen.

French President Nicolas Sarkozy and German Chancellor Angela Merkel prepared the ground for a difficult year in speeches at the weekend. They said 2012 would be a year of slower growth. Merkel said Europe was experiencing its “harshest test in decades”.

Manufacturing has faltered after strong growth in 2010 and the first half of 2011. The Markit/CIPS purchasing managers’ index (PMI) survey, where a reading below 50 indicates a contraction, rose to 46.9 in December, up from 46.4 the previous month. The average PMI reading in the final quarter of 2011 was the weakest since the second quarter of 2009. Chris Williamson, chief economist at Markit, said: “Eurozone manufacturing is clearly undergoing another recession.”

The survey said a fall in production at eurozone manufacturers reflected a seventh successive monthly decline in new orders, which in turn reflected a combination of lower demand in domestic markets and reduced international trade. Howard Archer, chief British and European economist at IHS Global Insight, estimated that the eurozone’s gross domestic product declined by 0.4% in the final quarter of the year.

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