Eurozone economy stalls on setback in Germany

Alex Pigman, with Simon Morgan in Frankfurt
Germany's Purchasing Managers Output Index (PMI) hit a three-month high, a welcome respite after a raft of poor data out of Europe's leading economy
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Germany's Purchasing Managers Output Index (PMI) hit a three-month high, a welcome respite after a raft of poor data out of Europe's leading economy (AFP Photo/John Macdougall)

Brussels (AFP) - Growth in the 18-country eurozone ground to a halt in the second quarter, official data showed Thursday, dragged down by France and Germany and casting a cloud over the crisis-hit region.

Stagnation in the single currency bloc, already threatened by deflation, fell short of analysts' forecast of 0.2 percent growth.

The figures will force governments to cut growth estimates for the rest of the year, putting budget deficit targets into jeopardy and clouding the outlook for growth of the global economy.

The downbeat data will also heap more pressure on the European Central Bank to unleash new monetary measures to restart the economy.

The unexpectedly poor growth figure was mainly the result of a surprise 0.2-percent shrinkage in Germany, usually the reliable eurozone growth engine, and stagnation in an already fragile French economy.

"Strong growth figures in some of the former crisis countries and small Eastern member states were not enough to offset the slowdown in Germany ... hit by the 'Putin factor' as well as the reform laggards France and Italy," said Christian Schulz, a London-based economist at Berenberg Bank.

Italy has already reported contraction of 0.2 percent for the quarter, while Spain, in need of a boom after years of deep crisis, disappointed somewhat with growth of 0.6 percent.

Analysts expected that growth would accelerate later in the year, but with geopolitical tensions in Ukraine enduring, there is now deep concern that a fragile recovery in the eurozone might be in danger.

"It now looks very likely that GDP (gross domestic product) growth for the whole of 2014 will remain below 1.0 percent," said analyst Peter Vanden Houte of ING Bank.

- Setback for France -

France showed zero growth for the second quarter running, forcing the government to downgrade its outlook for the year by half, to 0.5 percent instead of 1.0 percent.

"Growth has broken down, in Europe and in France," Finance Minister Michel Sapin said.

He admitted that Paris would now renege on its promise to the EU that the French public deficit would be cut to 3.8 percent of output in 2014.

Analysts have warned for months that France, the second-biggest eurozone economy, looks increasingly like the weak link in a halting European recovery, as the government struggles to push through reforms.

The strongest quarterly growth across the EU occurred mainly in the east, with Latvia expanding by a full percentage point and Hungary by 0.8 percent.

Britain lies outside the eurozone which has allowed its central bank to enacted years of highly accommodative monetary policy, and it too expanded by 0.8 percent over the quarter.

- Temporary blip? -

For Germany, at least, economists were confident the second-quarter contraction would prove short-lived.

"Put simply, the first-quarter figure probably overstated underlying growth a bit, while the second-quarter decline understates it," Schulz said.

The other cloud looming over the eurozone is low inflation, which Eurostat on Thursday confirmed slowed to 0.4 percent in July, the lowest level since late 2009 and way below the ECB's target of just under 2.0 percent.

Falling prices are raising concerns that the bloc might be entering a dangerous spiral of low growth and demand that plagued Japan for a generation.

"In Japan in the 1990's, everything began with a financial crisis," economist Alexandre Delaigue of St. Cyr University outside Paris said.

"Then the country went into low inflation or deflation, sometimes a little growth, sometimes none, followed by accumulated deficits and a monetary policy that encouraged the status quo," he said.

On Thursday, the European Central Bank, which has been under strong pressure to engage looser monetary policy, suggested such fears were unwarranted.

In its latest survey, the ECB found that "a number of respondents argued that the trough of inflation has more or less been reached."

On the financial markets, the euro gained against the dollar based on the inflation forecast.

In Brussels, the European Trade Union Confederation said that austerity policies enacted across the eurozone were to blame for low growth.

"It’s no use blaming the weather or the situation in the Ukraine – the simple fact is that Europe needs a change in economic policy," the grouping of European unions said.