Euro zone economy stagnates in second quarter

Thursday 14 August 2014 21.41
1 of 2
Euro zone economy fares worse than expected in second quarter
Euro zone economy fares worse than expected in second quarter
European Commission says GDP report showed the importance of structural reforms
European Commission says GDP report showed the importance of structural reforms

Euro zone economic growth ground to a halt in the second quarter as Germany's economy shrank and France's stagnated

The zero growth reported by statistics agency Eurostat today was cause for alarm throughout the 18-nation region, which is already bracing for the impact of sanctions imposed on and by Russia over Ukraine. 

Germany, Europe's largest economy, contracted by 0.2% in the quarter, undercutting Bundesbank forecasts that gross domestic product would be unchanged.

Foreign trade and investment were notable weak spots, the German Statistics Office said today.

France fared little better; its GDP failed to grow for the second quarter in a row. 

That forced the French government to confront reality, saying it would miss its budget deficit target this year and cutting its 2014 forecast for 1% growth in half.

Italy, the euro zone's third-largest economy, slid back into recession for the third time since 2008 in the second quarter, shrinking by 0.2%. Pressure is growing on Prime Minister Matteo Renzi to complete promised structural reforms. 

Rome and Paris have led a drive to focus EU policy more on jobs and growth than on cutting debt. Germany and others have made clear they will only tolerate so much debate on that point. 

Bundesbank chief Jens Weidmann said this week that euro zone monetary policy should not aim to weaken the euro. Individual member states should take steps to boost growth, he said, rebuffing French calls for Germany and the European Central Bank to do more.

The European Commission said today's GDP report showed the importance of structural reforms.

"The ongoing adjustment in the euro area today is a story of a deep structural change," a spokesman for the European Commission told journalists. "External developments may increase uncertainty, but foundations remain intact."

Some euro zone countries report more robust Q2 data

Other euro zone countries were a little more robust. The Netherlands reversed a first-quarter contraction to expand by 0.5%, Austria was up 0.2% on the quarter and Finland eked out 0.1% growth.

Portugal, which exited an international bailout earlier this year, saw its economy expanding 0.6% on the quarter after a 0.6% contraction in the three months to March.

Greece, the epi-centre of the euro zone debt crisis, is showing some signs of improvement. Its economy shrank in the second quarter at the slowest annual pace since late 2008, supporting expectations that Athens will emerge from its six-year slump this year. 

Meanwhile, Cyprus's recession-hit economy contracted by 0.3% in the second quarter, down from the 0.6% drop in the previous three months, an official estimate showed today.

Analysts mainly saw foreign trade and investment behind today's disappointing euro zone data. Consumer demand probably helped second-quarter growth - retail sales rose 0.4% on the quarter. 

The worry for the euro zone is that sanctions imposed on Russia over the Ukraine crisis, and Moscow's retaliation, will act as a further drag on growth.

Surveys suggest a rebound in the third quarter is growing less likely. The ZEW economic sentiment index released earlier this week, for example, showed German analyst and investor morale plunged in August to its lowest in more than over a year.

In a separate data release, Eurostat confirmed that euro zone inflation fell in July to its lowest level since the height of the financial crisis nearly five years ago, keeping the European Central Bank vigilant about risks of a deflation. 

Consumer prices in the euro zone rose by just 0.4% on the year in July, the weakest annual rise since October 2009 when prices fell by 0.1%, data showed. 

Annual core inflation - which excludes energy, food, tobacco and alcohol costs - stood unchanged at 0.8% for the second month in a row.