Slowdown in Europe leads to calls for ECB action

Poor figures on growth from leading euro economies Germany and France

People walking past a retail store that is having a sale in Rome. Italy slid into recession for the third time since 2008 in the second quarter. Photograph: Stefano Rellandini/Reuters

People walking past a retail store that is having a sale in Rome. Italy slid into recession for the third time since 2008 in the second quarter. Photograph: Stefano Rellandini/Reuters

Fri, Aug 15, 2014, 01:00

The European Central Bank (ECB) faces fresh calls to adopt growth-boosting measures after data out yesterday showed growth in the euro zone has stalled.

Economic growth in the second quarter was flat compared to the first quarter, Eurostat figures showed yesterday, combined with a drop in euro zone inflation.

Slowdowns in Germany, France and Italy – the euro area big three, comprising two-thirds of euro zone GDP – dragged down the overall growth figure from 0.9 per cent in the first quarter to 0.7 per cent in the quarter to the end of June.

Growth in Germany, the EU’s largest economy, contracted by 0.2 per cent while the French economy saw no growth at all over the same period. Italy, the euro zone’s third largest economy, has already entered recession.

Eurostat data shows the euro area’s inflation rate dropped to 0.4 per cent in July, its lowest rate since 2009 and well below the ECB’s inflation target of 2 per cent, or just below.

Fears over euro zone economic prospects saw interest rates on German sovereign debt, a safe haven for investors in uncertain times, drop for a time yesterday to a record low of less than 1 per cent.

The cost of borrowing fell across the euro zone, with 10-year yields in Belgium and Ireland falling to record lows.

Yesterday’s data added to European economic uncertainty caused by the EU stand-off with Russia over Ukraine. Last week Moscow imposed sanctions on European food imports in retaliation to EU economic sanctions against Russia.

Weakness in the euro zone core followed mixed results in the bloc’s crisis countries. After Portugal posted a 0.6 per cent contraction in the first quarter it grew by 0.6 per cent in the quarter to the end of July. Spain also continued to recover with 0.6 per cent rise in gross domestic product (GDP). However the economies in both Greece and Cyprus have continued to contract.

The European Commission said the Eurostat data underlined the importance of pressing ahead with structural reforms. “The ongoing adjustment in the euro area today is a story of a deep structural change,” said a commission spokesman. “External developments may increase uncertainty, but foundations remain intact.”

However France was quick to disagree, saying the weak data showed the need for a rethink of euro area economic policy.

“We must adapt the pace of deficit reduction to the exceptional situation . . . of growth that is too weak everywhere in Europe and the exceptional situation of inflation that is too weak across Europe,” said Michel Sapin, French finance minister, on French radio.

In an article in Le Monde, he urged the ECB to act against the threat of deflation and reduce the euro’s exchange rate.

Analysts said uncertainty over the euro area’s economic outlook would increase pressure on the ECB for greater intervention to boost growth.

Chris Williamson, economist at Markit, said stalling economic growth “raises concerns that the euro area is sliding back into a triple-dip recession”.

The weak euro zone data contrasts with positive numbers from the UK and US, while Irish economic forecasts remain positive.

A report from Davy Research on Wednesday predicted the Irish economy will grow by 3.5 per cent this year and by 3 per cent in 2015. It said short-term indicators suggested Ireland was Europe’s fastest growing economy.