Output in Italy, Spain and Greece fell in final quarter after figures showed that manufacturing output across the euro zone declined in December for a fifth consecutive month.

Italy, Greece and Spain saw the sharpest falls in production during the final month of 2011 as output and new business fell across all areas of production.

Stock markets in Paris, Frankfurt and Milan rose after the figures proved slightly better than expected in France and Germany, with the German Dax up 3 per cent at 6075 and Paris Cac up 2 per cent at 3222. But the first economic figures of the New Year were widely interpreted as a strong signal that the eurozone is heading into recession. To emphasise the lack of confidence among investors in the prospects for the euro zone, the value of the euro continued its decline against the dollar and the yen.

French president Nicolas Sarkozy and German chancellor Angela Merkel prepared the ground for a difficult year in speeches at the weekend. They said 2012 would be a year of slower growth. Merkel said Europe was experiencing its “harshest test in decades”.

Manufacturing has faltered after strong growth in 2010 and the first half of 2011.

The Markit/CIPS purchasing managers’ index (PMI) survey, where a reading below 50 indicates a contraction, rose to 46.9 in December, up from 46.4 the previous month. The average PMI reading in the final quarter of 2011 was the weakest since the second quarter of 2009.

Chris Williamson, chief economist at Markit, said: “Euro zone manufacturing is clearly undergoing another recession.” The survey said a fall in production at euro zone manufacturers reflected a seventh successive monthly decline in new orders, which in turn reflected a combination of lower demand in domestic markets and reduced international trade.

Howard Archer, chief UK and European economist at IHS Global Insight, estimates that the euro zone’s gross domestic product declined by 0.4% in the final quarter of the year. He said: “The fifth successive ... contraction in manufacturing activity during December maintains concern that the weak manufacturing sector is leading the euro zone into recession.” Exports have declined along with domestic orders after the euro zone crisis deepened last July when worries surfaced over the solvency of Italy and Spain.

Italy’s new government of technocrats, which pushed through EUR30bn (GBP25bn) of spending cuts and tax rises before Christmas, is under pressure to bring its budget deficit under control after a sharp rise in its cost of borrowing. Analysts said the country will need to borrow $200bn in the first three months of the year at rates lower than 7 per cent if it is to avoid a second crisis.

Spain’s cabinet is expected to meet for the first time to discuss new tax rises designed to stem a ballooning budget deficit, while in Greece pharmacists and doctors went on strike over plans to cut health spending and reduce profit margins on the sale of drugs.

France was not immune to the declines in manufacturing. Paris-based PSA Peugeot Citroen, Europe’s second-biggest carmaker after Volkswagen, posted a 29 per cent plunge in December sales. Its domestic rival, Renault, recorded a 28 per cent drop.

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