Canadian Manufacturing

Weakness in Germany, France and Italy ding economic growth

Europe's core economies were the problem in Q2, even as smaller, peripheral economies are recovering from the debt crisis

FRANKFURT, Germany—The shaky economic recovery in the 18-country eurozone ground to a halt in the second quarter, as Germany and France were held back by weaker investment by business and by fears over the crisis in Ukraine.

The German economy—the biggest among the countries that use the euro—shrank by a quarterly rate of 0.2 per cent while France showed zero growth for the second straight quarter. Italy, the third-biggest economy, shrank.

The outcome reported by Eurostat, the European Union’s statistics office, was slightly lower than the 0.1 per cent growth expected by market analysts. Some analysts had already scrapped more optimistic projections in the days ahead of the announcement amid a run of disappointing economic news.

The figures bring an end to the eurozone’s paltry recovery from its longest-ever recession. Growth, which has been patchy across the region and dependent on Germany, has lasted just four quarters.

The eurozone isn’t the only economy that’s showing signs of losing momentum. Japan reported a big second quarter decline, though that was largely due to the impact of a new sales tax, while the U.S. has shown some weakness despite ongoing jobs growth.

While a mild German winter that shifted construction from the second quarter to the first was a key factor behind the underperformance, economists say fears the Ukraine crisis may escalate are making companies in Europe hesitate to invest and consumers to postpone spending.

But beyond temporary factors, a failure to enact cuts in bureaucracy, taxes and rigid labour rules —so-called structural reforms—hangs over the eurozone as it tries to heal from its crisis over too much government debt.

That’s particularly true for Italy, which shrank 0.2 per cent in the quarter and earned a scolding from European Central Bank head Mario Draghi, a former top Italian finance official, for not moving forward on reforms.

This time it was Europe’s core economies that were the problem, even as smaller, peripheral economies are recovering from the debt crisis. Spain and Portugal both showed robust growth of 0.6 per cent.

And Greece, the country at the forefront of the debt crisis which has seen its economy shrink by around 25 per cent over the past few years, is on the mend. Its economy was only 0.2 per cent smaller than it was the year before, the smallest rate of decline in nearly six years. Greece does not report quarterly figures.

Economists think Germany’s slowdown may be temporary but France’s suggests deeper problems. The German state statistical office said imports, supported by steady demand from domestic consumers, rose more than exports, weighing on growth. Spending on business investment also fell, particularly in new buildings. A mild winter may have meant construction activity moved up to the first quarter, suggesting the second quarter figure may understate growth.

Meanwhile, France’s economy has slowly stagnated as pro-business reforms have lagged. A cut in payroll taxes aimed at helping lower labour costs for businesses and making France more competitive so far has had little effect.

The figures will likely raise pressure on the European Central Bank to enact more measures to support the recovery. The ECB has already cut its main interest rate to a record low of 0.15 per cent in an effort to reduce borrowing costs even further for businesses and consumers. And it is offering long-term cheap loans to banks, in hopes that will encourage them to lend more.

The ECB has held off from large-scale purchases of financial assets, or so-called quantitative easing, a step which adds newly printed money to the financial system.

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