Data reveals further chinks in euro zone recovery

Further chinks in the euro zone's recovery emerged yesterday, as official figures showed Portugal sank into a deeper deflation last month and a closely watched poll of German economic sentiment saw its sharpest fall in more than two years.

Prices in Portugal dropped by 0.7 per cent in the year to July, against expectations of a fall of 0.2 per cent, underlining the threat falling costs continue to pose to the currency area’s economy.

Meanwhile, the Germany’s ZEW index of financial market confidence hit an 18-month low of 8.6 points in August, losing 18.5 points since July in the sharpest fall since June 2012, amid tensions with Russia.

ZEW, the think-tank that compiles the index, said the crisis in Ukraine had "markedly" cut investment by German companies. "Since the economy in the euro zone is not gaining momentum either, the signs are that growth in Germany will be weaker in 2014 than expected."

German economy

GDP data released tomorrow is expected to show the German economy failed to grow at all between April and June, after expanding by 0.8 per cent in the first three months of 2014.

“Fear is back,” said ING economist Carsten Brzeski. “Today’s ZEW sends a worrying signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend.”

The latest indication of sagging confidence in Germany, the euro zone’s largest economy that remains one of its strongest, came as official inflation figures from Portugal highlighted that demand remains weak in parts of the currency area’s periphery.

The Portuguese data showed retailers slashed the price of clothing and footwear, with costs falling by 7.45 per cent in the year to July. “This further slide into negative territory is somewhat surprising, as it comes against a background of increasingly buoyant measures of consumer confidence,” said Colin Bermingham, economist at BNP Paribas. “The lack of pricing power highlights that retailers are not yet confident that consumers can withstand price increases.”

Tuesday’s data comes amid mounting concern that the euro zone’s fledgling recovery is losing momentum.

Low inflation

Inflation remains low across the currency bloc, and at 0.4 per cent is less than a quarter of the ECB’s target of below but close to 2 per cent.

Figures for euro zone GDP, out the same day as the German figures, are expected to show growth weakened from 0.2 per cent in the first three months of the year to 0.1 per cent in the second quarter. –(Copyright The Financial Times Ltd 2014)