Return of Europe recession is bad news for U.S.

A European flag waves in front of the Reichstag building with the inscription 'Dem deutschen Volke' ('To The German People') in Berlin, Germany, Thursday, Aug. 23, 2012. Official data show that Germany posted a budget surplus for the first half of this year thanks to its strong labor market, even as other eurozone countries struggle with deficits.
AP Photo/Markus Schreiber

(MoneyWatch) The eurozone's return to recession is particularly bad news because it is now hitting once strong economies like Germany. This means the recession will last longer and have a bigger impact on U.S. consumers and companies.

Figures released today showed that collectively the economies of the 17-country eurozone contracted by 0.1 percent between July and September. While this is a slight improvement over the second quarter of the year when it shrank by 0.2 percent, the definition of a recession is two straight quarters of contraction. Most analysts believe that the recession will continue at least until the end of 2012.

"The recession in southern Europe is slowly creeping to other countries," says Martin Van Vliet, an analyst with ING. "If you look at the indicators for the fourth quarter you see that even Germany many not grow again and that shows that the economy has an enormous need for a new impulse."

The relatively small size of the overall contraction doesn't show the full scope of the problem facing Europe. Some nations -- notably France and Germany -- even saw their gross domestic product expand. Howard Archer at IHS Global is one of many analysts who do not expect these expansions to continue.

"Latest data and survey evidence remain generally weak, and the odds currently strongly favor the eurozone suffering further GDP contraction in the fourth quarter of 2012," he said. "Significantly, Germany looks to be in severe danger of contracting in the fourth quarter, as does France."

Indeed you don't have to look very far to see how widespread the economic slowdown is.

Industrial production for the entire eurozone fell 2.5 percent in September from August, according to Europe's statistics agency, Eurostat. That is the largest one month decline since January 2009 and one that totally reversed the 0.9 percent increase in August. Germany, Europe's largest economy and main financial backer, saw a 2.1 percent drop because of a steep drop in car sales in Europe. Nations already staggering from the debt crisis were hit even harder. For example Greece and Portugal saw output fall 4.4 percent and 12 percent, respectively.

Investors do not think Germany will pull out of this anytime soon. The November ZEW investor sentiment index, which measures investors' expectations for the German economy in six months' time, fell from -11.5 to -15.7. It had been expected to rise. The fall deeper into negative territory means that an increasing majority of those surveyed now expect German economic conditions to deteriorate.

Despite this, investors still believe Germany will do better than the rest of the eurozone. An auction Wednesday of short-term German government bonds resulted in negative yields: Investors were paying the German state for the privilege of lending money to it. This is the first time this has happened since July when the debt crisis looked close to spiraling out of control.

Europe is the U.S.'s largest trading partner, so all this will have a significant impact on our economy. American companies are already reporting declines in income as European sales have continued to fall. Many business units in the EU are laying off workers and adding to the economic slowdown.

Economists say that the U.S. economy is currently "decoupled" from the rest of the world. This means it has somehow separated itself from the forces which have slowed down the global economy. Without people to buy American goods and services it is difficult to believe this decoupling will last.

  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.