EURO-ZONE growth contracted at its fastest ever rate at the end of last year, with an unexpectedly bad German performance deepening the recession more than had been feared.

Gross domestic product in the 16-country region slumped by 1.5 per cent in the final quarter of 2008 – the same pace of contraction as in Britain but faster than the 1 per cent fall in the US.

The turnaround in fortunes is particularly dramatic because economic instability had become rare in Europe. Until last year, the euro zone had never reported a quarterly contraction in GDP growth. But economists expect the euro-zone economy to contract by as much as 2 per cent this year – making the recession one of the worst in continental Europe since the second World War.

Germany has been especially badly hit by the collapse in global demand. Europe’s largest economy contracted by a much larger than expected 2.1 per cent in the fourth quarter, the sharpest fall since the country was reunified in 1990.

Recent confidence indicators, such as the Ifo’s business confidence survey, suggested the worst of Germany’s recession is over. Still, economists expect Germany to contract by a further 2 per cent or more this year – which would make it by far the worst economic year in the country’s post-second World War history. France, meanwhile, reported a 1.2 per cent contraction in the fourth quarter – but is still not in a technical recession, defined as two consecutive quarters of negative growth. Italian GDP, however, fell for the third successive quarter, plummeting by 1.8 per cent in the final three months of last year. Portugal was also among the worst performers, reporting a 2 per cent drop. Spanish data, released on Thursday, showed a 1 per cent fall.

While Spain and Ireland have been hit by collapsing housing markets, the euro zone as a whole has been cushioned from such factors. But German exports, which drove growth, have been badly affected by the slump in global demand.