Eurozone growth halts as German economy shrinks 0.2pc
GROWTH in the eurozone stuttered to a halt in the three months to June as Germany's economy contracted and France stagnated.
It comes just days after it was announced Italy, the eurozone's third largest economy, slipped back into recession in the second quarter
In another blow to hopes of a recovery in the 18 nation bloc, GDP remained flat in the second quarter, initially sending stocks lower yesterday. But by mid afternoon European shares had recovered amid heightened speculation that the European Central Bank (ECB) would have to carry out further stimulus to help kick start activity.
Of particular concern was the 0.2pc contraction in Europe's economic powerhouse Germany, which even undercut forecasts from the Bundesbank and came on the back of a fall in inflation and a drop in investor confidence.
France fared little better as its economy stagnated.
The French government announced that it had slashed its growth estimates for this year and next and claimed it would miss its deficit targets. The figures released by the European statistical agency Eurostat came ahead of the recent deterioration in relations between Russia and the European Union, which has led to tit-for-tat sanctions, including a ban by Russia of food imports from the EU.
Analysts have argued that ECB President Mario Draghi is likely to go for quantitative easing, an asset-buying programme, sooner rather than later.
"Mario Draghi's bold 'whatever it takes' speech surprised markets and was instrumental in containing the unfolding euro drama," said Diana Choyleva, head of macroeconomic research at London-based Lombard Research.
"He will need to be valiant again if the euro area has any chance of pulling off much-needed painful deleveraging without a return to political tensions."
Italy slid back into recession for the third time since 2008 in the second quarter, shrinking by 0.2pc. Pressure grew on Prime Minister Matteo Renzi to complete promised structural reforms.
France and Italy have led a drive to focus EU policy more on growth than on cutting debt. Mr Renzi has made it one of the key planks of Italy's Presidency of the EU.
The European Commission said yesterday that the GDP report showed the importance of structural reforms.
"The ongoing adjustment in the euro area today is a story of a deep structural change," a spokesman said.
"External developments may increase uncertainty, but foundations remain intact."
German Economy Minister Sigmar Gabriel blamed his country's slowdown on threats from eastern Europe and the Middle East, and a weaker eurozone. Also, he said, construction continued during a mild winter, so the second quarter did not see the usual recovery in building work.
But German GDP should increase in the remainder of 2014, he added.
"Growth rates in Germany will likely return to growth in the rest of this year, but the risks from abroad have, without doubt, increased."
Meanwhile, French Finance Minister Michel Sapin said the eurozone's second-largest economy would grow by only about 0.5pc in 2014, half the previous forecast, meaning the public deficit would top 4pc of GDP, missing a 3.8pc target.
(Additional reporting Reuters)