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Europe

Eurozone growth slumps in second quarter

Text by News Wires

Latest update : 2011-08-16

Weighed down by a sharp decline in German and French growth, the eurozone on Tuesday reported a meagre growth rate of 0.2%. The data was released ahead of a key summit between France and Germany on the bloc's debt crisis.

REUTERS - The euro zone economy slowed sharply in the second quarter, hobbled by sluggish growth in Germany and stagnation in France, raising fears of a longer-term dip that could derail efforts to resolve the bloc's debt crisis.

The 17-nation single currency area grew by just 0.2 percent on a quarterly basis, data showed on Tuesday, a touch under forecasts and well below first quarter growth of 0.8 percent.

The slowdown gripped the bulk of the region, with growth in the bloc's powerhouse Germany sinking to just 0.1 percent in seasonally adjusted terms, its weakest in more than two years and slipping from a downwardly revised 1.3 percent in the first three months.

That put the area's top two economies on the back foot, with figures last week showing French output stagnated in the second quarter.

The picture was equally grim for the region's high debtors -- particularly Greece, Italy, Spain, Portugal and Ireland -- where little or no growth means make debt-cutting targets will be even harder to achieve as tax revenues shrink and welfare payments rise.

"We see falling leading indicators, and that means that we see also weak growth in the third quarter," said Christoph Weil, European economist at Commerzbank.

"The core countries had very weak growth, and that could be a problem if this trend continues."

Spain, one of the countries facing market attack over its debt burden, grew just 0.2 percent, reviving concerns it could slip back into recession.

Growth was zero in neighbouring Portugal, sparing the beleaguered bailout recipient a further contraction thanks only to a bounce in exports.

Support for growth?

International Monetary Fund chief Christine Lagarde said reducing debt remained the priority but that countries should not rule out short-term support for jobs and growth.

"Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing," Lagarde wrote in the Financial Times newspaper ahead of the data.

There was little sign of growth anywhere in the bloc from Tuesday's reports.

Only Austria bucked the trend, expanding by 1.0 percent.

Tuesday's data make further interest rate rises less likely from a European Central Bank that has already overcome internal opposition to buy the bonds of Italy and Spain after their debt yields soared to alarming levels.

"The situation in the international economy has again increased concerns in recent weeks. There is more uncertainty about economic growth than before," ECB Governing Council member Erkki Liikanen said in Turku, Finland.

Serious slowdown?

Economists see momentum in international trade slowing in the months ahead and forward-looking indicators have also been downbeat of late, as worsening debt crises in Europe and the United States stoked fears the rich world could slide back into recession.

European planemaker Airbus' sales chief John Leahy warned a new recession was possible.

"I would not be surprised to see some weakness in the economy. I'm not sure it is back to 2008 but I think a double-dip recession is definitely a possibility," Leahy told reporters by telephone in Sydney.

The German growth reading, which compared to a Reuters consensus forecast for a 0.5 percent expansion, was the weakest since the first quarter of 2009.

The euro extended losses, falling from a three-week high versus the dollar, after the data, while European shares shed 1.5 percent.

The growth numbers will further frazzle market nerves ahead of a meeting later in the day between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Paris, which is due to address how better to coordinate the bloc's economies.

Both countries have said the topic of common euro zone bonds, an idea gaining traction in the bloc as concerns about debt servicing in a swath of euro zone countries persist, is not on Tuesday's agenda.

Germany, Europe's largest economy, has been a star performer since the end of the 2008 financial crisis. A slowdown there would make any underwriting of euro zone debt an even harder sell politically to an already reluctant electorate.

"While German politicians are currently racking their brains on the pros and cons of common euro bonds, the luxury of having an economy running at 'wonder' speed is fading away," said ING economist Carsten Brzeski.

Date created : 2011-08-16

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