EU Says Euro Area to Shrink in 2013 as Unemployment Rises

Gross domestic product in the 17-nation region will fall 0.3 percent this year, compared with a November prediction of 0.1 percent growth, the Brussels-based commission forecast today. Unemployment will climb to 12.2 percent, up from the previous estimate of 11.8 percent and 11.4 percent last year. Economic and Monetary Affairs Commissioner Olli Rehn said authorities must press on with reforms to end the region’s debt crisis and help the recovery. While “hard data” has been disappointing, there also has been more encouraging “soft data” that points to better times, he told reporters today. A strengthening of the euro economy later this year may be led by Germany, where investor confidence rose in February to a 10-month high. The commission’s weak outlook reflects government austerity measures and efforts by companies and consumers to reduce debt. The European Central Bank said today banks will next week return 61.1 billion euros ($80.5 billion) of its second three-year loan, a measure introduced to aid lending at the depths of the financial crisis.

“We clearly have a decoupling with different recovery trends, with Germany certainly recovering at a much faster pace,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “We still have a lot of noise and volatility in the monthly data, but the bottom line is that the euro zone as a whole has already turned.”

The commission cut its forecast for the German economy, Europe’s largest, to 0.5 percent growth this year, from 0.8 forecast in November, due to a drop in euro-area demand that damps export and investment.

In a sign that Europe’s largest economy is anticipating better times, the Ifo institute in Munich said its business climate index climbed to 107.4 from 104.3 in January. That’s the biggest increase since July 2010 and the fourth straight monthly gain. Earlier this week, the ZEW gauge of investor sentiment rose to the highest in almost three years.

Separately today, the ECB said 356 financial institutions will repay money on Feb. 27 from its second long-term loan. The 61.1 billion-euro figure is about half the 122.5 billion euros forecast by economists. The ECB flooded markets with more than 1 trillion euros in three-year loans a year ago and banks have the option of repaying after 12 months. They started returning the initial loan last month.

“The second LTRO was used by a wider range of institutions with poorer collateral and given the positive carry still on offer, it makes sense for many of these institutions to hold on to these funds,” said Elsa Lignos, a currency strategist at Royal Bank of Canada in London. “We wouldn’t take this as a sign that financial tensions are returning.”