Euro-zone economy shrinks despite German growth

Second quarter figures show 0.2pc contraction, even though Germany managed 0.3pc growth

PUBLISHED : Wednesday, 15 August, 2012, 12:00am
UPDATED : Wednesday, 15 August, 2012, 1:33am


The euro zone's debt-ravaged economy shrank in the second quarter, having flatlined in the first, despite continued German growth which economists said could soon be snuffed out.

The 17-nation currency bloc contracted by 0.2 per cent on the quarter, data showed yesterday. Germany eked out growth of 0.3 per cent, marginally beating forecasts, but its forward-looking ZEW sentiment index slid for a fourth month running.

Economists said worse is likely to come and even Europe's largest economy is unlikely to defy gravity for long unless decisive action is taken to tackle the bloc's debt crisis.

"Growth turned out to be pretty solid. But this could be the last positive piece of news out of Germany for some time," said Joerg Kraemer at Commerzbank. "The German economy could contract in the summer. It is fundamentally in good structural shape, but can't decouple from the recession in the euro zone, plus the global economy has also shifted down a gear."

Aside from a downward blip in the last three months of 2011, the euro zone has posted pretty consistent, albeit anaemic, growth in the past three years although some of its debt-laden members have been in recession for some time.

"It was a touch better than we expected, but I think overall it confirms the idea that the euro zone is in a recession phase," Aline Schuiling, an economist at ABN Amro, said.

"What we see is a vicious circle of budget cuts, high interest rates in the periphery and sovereign debt rising," she said. "Policymakers are moving very slowly … We expect another contraction in Q3."

In France, it was the third straight quarter of zero growth. The central bank has already said it expects a mild contraction in the third quarter.

Austria and the Netherlands almost matched Germany's performance, each posting growth of 0.2 per cent. Finland suffered a 0.7 per cent year-on-year fall in GDP.

Bailed-out Portugal's recession deepened, with GDP diving by 1.2 per cent on the quarter and Cyprus contracted by 0.8 per cent. Data on Monday showed deficit-cutting measures helped to shrink Greece's economy 6.2 per cent year-on-year in the second quarter. Italy's data last week showed the economy contracted 0.7 per cent quarter-on-quarter, compounding the government's difficulties as it tries to avoid a bailout. Spain's economy shrank 0.4 per cent over the same period, pushing it deeper into recession.