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European economy savaged as recession bites deeper

Economic sentiment in the euro area plunged to an all-time low in December and German exports suffered a record decline, pushing the bloc's ailing economy deeper into the jaws of recession.

The European Commission said economic sentiment in the 15 countries using the euro fell in December to the lowest level since records began in 1990. Business morale also worsened.

Manufacturers in Europe have been rocked by a sharp downturn in global demand since the financial crisis erupted, prompting widespread job losses and hitting domestic investment hard.

Governments have launched stimulus packages worth billions to offset the crisis, but so far the gloom has only mounted.

Fabienne Riefer, an economist at Postbank in Bonn, said there was no sign that the slump had bottomed out.

“The economic horror scenario for the winter half year is becoming clearer and clearer,” she said.

Stung by crumbling demand, exports from Germany, Europe's biggest economy, fell by an unprecedented 10.6% month-on-month in November, official data showed.

German manufacturing orders plunged 6% after a record collapse in the previous two months.

At the other end of the continent, a bigger than expected rise in the number of jobless in December meant that unemployment in Spain is now topping 3 million for the first time in more than 12 years, government data showed.

Separately, the European Commission's business climate index for the single currency area tumbled to -3.17 points - the lowest since records started in 1985 - from -2.10 in November.

Commerzbank economist Christoph Weil said the Commission figures pointed to a contraction in euro zone gross domestic product of between 2% and 3% this year, putting pressure on the European Central Bank to cut interest rates.

“The ECB is likely to lower its key interest rate in coming months by a further 150 basis points to 1%,” he said.

The German trade figures showed demand for goods was weakest from European Union countries outside the euro area.

Exports to non-euro zone EU countries fell by 16.1% on the year. They fell 7.8% to non-EU countries.

Germany has been the world's biggest exporter of goods since 2003, and analysts said the latest figures reflected the pain now being felt by the likes of the car and chemical industries.

“December's (trade) figures will be even worse,” Axel Nitschke, head of foreign trade at the German chambers of industry and commerce (DIHK) told Reuters.

German carmakers such as Daimler and Volkswagen have already carried out or considered cuts to production to compensate for weak demand.

Earlier this week, Daimler said its Mercedes-Benz cars division saw a 23.5% decrease in US sales in December.

Deutsche Bank has predicted the German economy could contract by up to 4% this year - which would been more than four times as bad as the country's previous post-war nadir.

If this were to come about, German unemployment could double to around 6 million, Goldman Sachs has forecast.

Jennifer McKeown, an economist at Capital Economics, said the situation in the euro area was so bleak that the ECB could have to cut rates to “more or less zero.”

“December's EC survey brings more alarming evidence that the recession in the euro-zone is deepening rapidly,” she said. (Reuters)