Euro zone drifts towards another recession as economies contract

Wed, Aug 15, 2012, 01:00

THE EURO zone edged closer to its second recession in three years after a resilient economic performance from Germany and France failed to prevent the single currency bloc from contracting in the second quarter.

Gross domestic product in the euro area shrank 0.2 per cent in the three months to June, compared with the previous three months when there was no growth, as the economies of Greece, Italy, Spain and Finland contracted sharply.

“ confirmed that the euro zone is, to all intents and purposes, in recession, even if it has avoided the technical definition of two successive quarters of negative quarter-on-quarter GDP,” said Howard Archer, chief European economist at IHS Global Insight.

Robust investment and domestic consumption helped the German economy expand 0.3 per cent in the second quarter, beating expectations of 0.1 per cent growth, while French GDP remained unchanged, avoiding an expected contraction.

The Netherlands also outperformed forecasts, growing 0.2 per cent.

But a 1 per cent fall in economic output in Finland, an ally of Germany in the battle for greater austerity in Europe, showed how the sovereign debt crisis troubling southern Europe is spreading to economically stronger northern states.

Economists warned that the resilience displayed by Germany and France was not sustainable and said that output was likely to drop sharply in the coming months.

“Against a backdrop of high tensions in financial markets, weak domestic demand among almost all euro zone members, output may fall over the next quarter,” said Catherine Stephan of BNP Paribas.

Nonetheless, better preliminary data than expected from Germany and France gave a boost to stock markets with the FTSE Eurofirst 300 gaining 0.5 per cent.

Pierre Moscovici, France’s finance minister, welcomed the news that the euro zone’s second-largest economy had avoided recession, despite warnings last week from the Bank of France that it would contract.

However, he said three successive quarters of zero growth was “not excellent . . . it’s zero growth so therefore it’s too weak”.

Mr Moscovici also acknowledged that meeting the 2013 growth target of 1.2 per cent would require a huge effort in fixing the economy and restarting growth.

Flat or slight growth in the core economies has accentuated the north-south divide in the euro zone, which could be a preoccupation for the European Central Bank as it considers more monetary easing.

Portugal recorded a contraction of 1.2 per cent while Italy and Spain had already confirmed they were stuck in double-dip recession with negative growth of 0.7 per cent and 0.4 per cent respectively.

Greece continued to be the worst hit with an economy shrinking at an annualised pace of 6.2 per cent.

“However, even in the countries still displaying positive GDP growth the momentum is clearly unfavourable and the output gap still firmly in negative territory,” said Gilles Moec of Deutsche Bank.

Finland, which regards itself as closer to the zone’s core than its periphery, reported that its economy shrank 1 per cent in the second quarter compared with the first: the only euro zone countries that fared worse were Greece and Portugal.

They blamed the weak economy on the euro zone crisis itself and the resulting weakness in global demand. – (Copyright: The Financial Times Limited 2012)