Eurozone Economy Contracts for the First Time

The eurozone economy has contracted for the first time since the launch of the euro a decade ago, with France hit unexpectedly-badly by high oil prices and deteriorating global conditions.

Gross domestic product in the 15-country region fell by 0.2 per cent in the second quarter, reported Eurostat, the European Union’s statistical office. That marked a sharp turnaround from the first three months of the year, when GDP expanded by 0.7 per cent.

After escaping the worst effects of the global fallout from the US sub-prime mortgage crisis, the main eurozone economies have instead suffered from the impact of surging energy costs on consumer spending, tumbling business confidence and slower growth elsewhere in the world. Even during the slugging growth period at the start of the decade, quarterly growth figures had remained positive.

The pace of the latest slowdown is likely to worry eurozone policymakers especially as the US economy appeared to stage a mid-year recovery. US GDP rose by 0.5 per cent in the second quarter, although that could have reflected one-off measures to boost the economy.

Fears of a technical recession – two consecutive quarters of negative growth – are widespread across the eurozone. Jean-Claude Trichet, president of the European Central Bank, warned earlier this month that the second and third quarters would be particularly weak”.

Confirmation the eurozone growth has gone into reverse comes a day after Japan, the world’s second largest economy, revealed its worst quarterly performance for seven years and the Bank of England presented a gloomy outlook for the UK economy.

Developed economies have been hit this year by the impact of the credit squeeze and the effect it has had on mainstream economic activity.

The eurozone’s deterioration is unlikely to lead to early cuts in official borrowing costs, however. The ECB will be alarmed by rising fears about future inflation rates by professional forecasters, as reported in its latest monthly bulletin. Longer-term expectations – for inflation in 2013 – were the highest since the survey began in 1999, it warned.

Eurozone inflation hit a record 4 per cent in July, Eurostat said, although that was lower than its initial estimate of 4.1 per cent. Economists generally expect ECB interest rates to remain at the current 4.25 per cent until at least the end of the year.

Germany’s economy – Europe’s largest – contracted by 0.5 per cent in the three months to June. But that was less than expected by recent leaks from Berlin and largely reflected a correction after exceptionally robust start to the year, although the country’s statistical office revised down its estimate of first quarter growth from 1.5 per cent to 1.3 per cent.

However, France reported a significantly worse-than-expected 0.3 per cent fall in second quarter GDP, after a 0.4 per cent rise in the first three months of the year. Unlike in Germany, falling real wages are a new phenomenon in the eurozone’s second largest economy and French consumer spending – which previously powered growth – has been broadly flat since the start of the year. Still, Christine Lagarde, the French finance minister, said there was no question of a recession” with the fundamentals of the country’s economy remaining healthy.

Meanwhile, Spain saw a sharp deceleration in economic activity as expected – although GDP growth remained positive, at 0.1 per cent in the first quarter. Spain’s economy, previously one of the region’s best performers, has been moving in line with others hit by sharp house market corrections, such as Ireland and, outside the eurozone, the UK.



Eurozone Economy Contracts for the First Time, Financial Times
8/14/2008 6:26:06 AM