Irish economy shrinks 1.2%

European markets traded lower Thursday after Ireland said its economy shrank and a closely watched gauge of business activity dropped more than expected.

Ireland's Central Statistics Office reported the Irish gross domestic product fell by 1.2 per cent in the second quarter, after rising 2.2 per cent in the first quarter in its first gain since 2007.

London's FTSE 100 index closed down 0.1 per cent, whileFrankfurt's DAX endeddown 0.4 per cent and the Paris CAC 40 was off by 0.7 per cent.

Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, called Thursday's growth figures "disappointing, to say the least."

He, like others, had been expecting second-quarter growth of around 0.5 per cent and accelerating growth through the rest of 2010.

"All in all, it now looks like Ireland will be posting negative real GDP and GNP growth in 2010 for the third year running, with the positive growth forecasts for next year also set to be lower than previously thought," McQuaid said.

A bigger-than-expected decline in Europe's monthly purchasing managers index, or PMI, also weighed on markets.

The Markit euro-zone composite output index, which combines manufacturing and services, fell to 53.8 in September from 56.2 in August.

German growth slows

Particularly worrying was that the figures showed that growth in Germany, Europe's economic powerhouse, has moderated far more rapidly than anticipated.

"The export-driven uptick seen in the first part of the year is coming to an abrupt halt, as the slowdown in economic activity seen outside the eurozone during the summer has started to affect the single currency area," said Marie Diron, chief economic adviser to Ernst & Young in London.

Ireland's GDP report prompted investors to sellIrish bonds, driving up its borrowing costs.

Interest rates on Ireland's 10-year bonds rose above 6.7 per cent for the first time since the euro's launch in 1999.