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The euro sculpture stands in front of the European Central Bank ECB in Frankfurt. (Michael Probst/AP)
The euro sculpture stands in front of the European Central Bank ECB in Frankfurt. (Michael Probst/AP)

Euro zone edges closer to recession with 0.2% contraction Add to ...

The euro zone headed for a possible recession with a 0.2 per cent contraction in the second quarter, but Germany steered clear of the worst of the debt crisis to post better-than-expected growth.

“GDP fell by 0.2 per cent in both the euro area and the EU27 during the second quarter of 2012, compared with the previous quarter,” according to flash estimates published by Eurostat, the EU statistical office.

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In the first quarter, gross domestic product growth stood at zero in both the EU and the group of 17 EU members that use the euro currency.

Compared with the same quarter of 2011, seasonally adjusted GDP fell by 0.4 per cent in the euro zone and by 0.2 per cent in the EU in the second quarter.

The figures reflect the crippling debt crisis that has engulfed the euro zone, forcing EU-IMF bailouts for Greece, Ireland and Portugal and aid for the Spanish banking sector, while battering market confidence.

The contraction, a result of governments slashing spending and raising taxes to tackle the debt crisis, sets the euro zone up for a possible fall into recession, commonly defined as two consecutive quarters of contraction.

The latest estimates also show how badly Europe now lags behind its main economic and trade partners, with Eurostat saying GDP rose by 2.2 per cent quarter-on-quarter in the United States and 3.6 per cent in Japan.

However the bloc’s largest economy, Germany, continued to defy the worst of the crisis, aided by exports and solid domestic demand.

Germany’s economy grew 0.3 per cent in the period from April to June, national statistics office Destatis said, fractionally faster than the 0.2 per cent forecast by analysts.

Nevertheless, growth was still slower than the 0.5 per cent seen in the first quarter, as Germany, too, begins to feel the effects of the long-running debt crisis that has pushed many European countries into recession.

“Positive impulses came from both consumer spending and from net foreign trade,” Destatis said in a statement.

“According to preliminary data, exports grew somewhat faster than imports. Furthermore, both private and public spending was higher than in the preceding quarter, helping to offset a decline in investment,” the statisticians said.

Analysts expressed confidence that Germany will not fall back into a recession.

“The German economy remains relatively resilient and the expected effects of the euro zone debt crisis remained limited,” said Newedge Strategy analyst Annalisa Piazza.

Meanwhile, France also defied expectations to post zero growth.

French Finance Minister Pierre Moscovici called the result “very weak” but held to the government’s forecast for 0.3 per cent growth in 2012.

“Despite the apparent resilience of French GDP, some worrying trends persist,” warned Berenberg Bank Senior Economist Christian Schulz.

He noted France is continuing to lose competitiveness to southern euro zone countries going through difficult adjustments, with imports outpacing exports and taking the trade deficit to record highs.

The trade deficit took 0.5 percentage points off France’s growth rate in the second quarter, after detracting 0.1 points in the first quarter.

Moreover France has yet to begin serious austerity, with government spending continuing to support the economy, he noted.

Stagnant growth will make it harder for France’s new Socialist government to deliver on its pledges to the EU to cut its budget deficit from around 4.5 per cent of GDP this year to the EU limit of 3.0 per cent by the end of 2013.

Elsewhere in the euro zone, Italy’s GDP shrank 0.7 per cent, Spain 0.4 per cent, Cyprus 0.8 per cent, Finland 1.0 per cent and Portugal 1.2 per cent.

Netherlands and Austria each booked 0.2 per cent growth, while Estonia grew by 0.4 per cent and Slovakia by 0.7 per cent.

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