The spectre of recession is looming over the eurozone after the economy in the 15-country region shrank for the first time since the single currency was introduced nearly a decade ago.

Eurozone output contracted by 0.2 per cent in the three months to June, after a 0.7 per cent rise in the first quarter, official figures showed.

Activity was dragged down by falling gross domestic product in the area’s traditional economic mainstays of Germany, France and Italy as consumers and businesses struggled with the soaring cost of fuel and energy.

A drop in exports because of weaker demand and the recent strong euro also curbed growth, which slowed from 2.1 per cent to 1.5 per cent on an annual basis. If output falls again in the next quarter, the eurozone will be in technical recession. A recession is defined as two quarters of contraction.

The worrying news for the European Central Bank was compounded as inflation in the region remained at a record high of 4 per cent in July. This was revised down marginally from an initial estimate of 4.1 per cent but is still double the ECB’s inflation target of close to 2 per cent.

The ECB kept rates on hold at 5.25 per cent last week, highlighting the risks to economic growth that were starting to appear. Yesterday’s figures will have dented chances of any more rate rises and leave the door open for cuts once inflation starts to fall. Economists said that a 0.3 per cent fall in France’s output in the three months to June was a surprise. A rise of 0.2 per cent had been expected.

Jennifer McKeown, European economist for Capital Economics, was even more downbeat. “It looks likely that the eurozone will be the first major economy to enter recession,” she said.

Britain’s exports are likely suffer as the eurozone accounts for more than a half of all its trade. The contraction in the French economy came as weak consumer spending failed to make up for a fall in investment and foreign trade. But Christine Lagarde, the Economy Minister, was upbeat, saying yesterday: “There is no question of a recession.”

German output, which accounts for about a third of eurozone GDP, fell 0.5 per cent, the first quarterly decline in nearly four years. Although the contraction was less severe than analysts had feared, Walther Otremba, the Deputy Economy Minister, said that a further fall could not be ruled out. Italy’s output fell 0.3 per cent.

Even so, output rose in some eurozone countries. Greece expanded by 0.6 per cent, Austria and Portugal 0.4 per cent and Belgium 0.3 per cent.

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