RTTNews - The euro area contracted the most since records began in 1995 on plummeting investment and exports, a first estimate from Eurostat confirmed on Wednesday.

The 16-nation bloc contracted 2.5% in the first quarter from the fourth quarter. This was the largest decline since 1995 and matched the initial estimate released on May 15. The decline in the fourth quarter was 1.8%. The stretch of contraction which started in the second quarter of 2008 indicates deep recession.

Year-on-year, gross domestic product was down by a revised 4.8%, bigger than the 1.7% drop seen in the fourth quarter. According to flash estimate, the economy had declined only 4.6% in the first quarter.

Among the components of GDP, household spending slid 0.5% versus 0.4% decrease in the fourth quarter. Meanwhile, government expenditure stayed flat after rising 0.4% in the fourth quarter. Investment decreased by another 4.2%. Exports and imports slipped 8.1% and 7.2%, respectively. At the same time, inventories contributed a negative 1% to GDP.

The recession in Eurozone was severe than in the U.S., where the GDP dropped 1.5% after falling 1.6% in the fourth quarter.

The European Union's statistics office revised GDP numbers for the EU 27. Accordingly, the economy shrank 2.4% sequentially, revised from 2.5% decline estimated initially. Also, annual contraction was revised to 4.5% from 4.4%.

The European Commission sharply lowered the GDP outlook for the euro area in its Spring Forecast. The 16-nation euro area is now expected to contract 4% in 2009 and 0.1% next year. The Brussels-based commission also projected a 4% contraction in European Union's GDP this year, making it the worst recession in the EU since World War II.

Indicating that the worst of the recession is over, the purchasing managers' index or PMI for the service sector improved in May. Reports said citing data released by the Markit Economics that the Eurozone service PMI rose to 44.8 in May from a flash reading of 44.7 and 43.8 in April. The PMI thus reached a seven-month high. However, the headline index is still below the 50-mark that divides expansion and contraction.

Consumer price annual inflation in May reached the lowest since the launch of euro ten years ago. A separate report from the statistical office in Luxemburg pointed towards easing inflationary pressures in the 16-nation euro area with producer prices showing biggest annual fall.

In April, producer prices recorded an annual 4.6% decline, much larger than the 2.9% decrease seen in March. On a monthly basis, industrial producer prices dropped 1% in the domestic market compared to prior month's 0.7% drop.

Last month, European Central Bank Governor Jean-Claude Trichet announced its plans to buy euro denominated covered bonds after holding interest rate at 1%. The ECB is set to announce its next interest rate decision on June 4. It is widely expected to retain the benchmark interest rate at a record low of 1%.

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