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Euro Area’s Recession Seen Over as Champagne Kept on Ice

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Photographer: Krisztian Bocsi/Bloomberg

As the pain in Europe’s periphery has eased, German growth has strengthened.

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Photographer: Krisztian Bocsi/Bloomberg

As the pain in Europe’s periphery has eased, German growth has strengthened. Close

As the pain in Europe’s periphery has eased, German growth has strengthened.

Photographer: David Ramos/Bloomberg

Pedestrians walk past old residential buildings in Bilbao, Spain. The nation’s economy shrank just 0.1 percent in the second quarter from the prior three months and unemployment fell from the highest levels in the country’s democratic history. Close

Pedestrians walk past old residential buildings in Bilbao, Spain. The nation’s economy shrank just 0.1 percent in the... Read More

Photographer: Akos Stiller/Bloomberg

A European Union (EU) flag flies in front of a statue outside the Hungarian central bank in Budapest. Economic confidence in the euro area, as measured by the European Commission, increased for a third month in July. Close

A European Union (EU) flag flies in front of a statue outside the Hungarian central bank in Budapest. Economic... Read More

Photographer: Simon Dawson/Bloomberg

An employee dressed in heat retardant safety clothing takes a break outside the furnace shop at the Badische Stahlwerke GmbH (BSW) steel mill in Kehl, Germany. As the pain in Europe’s periphery has eased, German growth has strengthened. The Economy Ministry is predicting growth of about three quarters of a percent. Close

An employee dressed in heat retardant safety clothing takes a break outside the furnace shop at the Badische... Read More

The euro-area economy probably edged back to growth last quarter for the first time since 2011, ending the longest recession since the single currency union started 14 years ago.

Gross domestic product in the 17-nation region expanded 0.2 percent in the three months through June after shrinking for the previous six quarters, according to the median of 41 forecasts in a Bloomberg News survey. The European Union’s statistics office in Luxembourg will release the data on Aug. 14. Germany probably grew about 0.75 percent, according to a government estimate, exceeding the 0.6 percent economists predict.

A year of relative calm on financial markets, budget cuts from Spain to Italy and accelerating growth in the U.S., the world’s biggest economy, have helped the euro area start to recover. While the overall outlook has improved, the recession has left the region with a youth unemployment rate of 24 percent, and parts of southern Europe remain mired in a slump.

“The external environment is really getting better, led by signs that U.S. demand is picking up,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The second quarter should mark the end of the recession in the euro area, but the recovery will be excruciatingly slow. We’re not getting the champagne out yet.”

Slowing Contractions

The euro slipped 0.3 percent to $1.3301 as of 4:16 p.m. London time. The Stoxx Europe 600 Index was little changed after advancing 0.6 percent last week to a 10-week high.

European Central Bank President Mario Draghi has described progress as “tentative.” Against that backdrop, the ECB has cut interest rates to their lowest-ever level and Draghi has pledged they’ll stay there or lower for an “extended period.”

Spain’s economy shrank just 0.1 percent in the second quarter from the prior three months. Still, the country’s youth unemployment is 56 percent. In Italy, where Prime Minister Enrico Letta is easing last year’s budget austerity, GDP fell a less-than-forecast 0.2 percent.

Economic confidence in the euro area increased for a third month in July. Manufacturing expanded for the first time in two years, according to a purchasing-managers survey by London-based Markit Economics.

Adecco SA (ADEN), the world’s largest provider of temporary workers, reported increased profit for the second-quarter, and the Glattbrugg, Switzerland-based company said it sees more positive signs for business as Europe’s labor markets stabilize.

German Growth

As the pain in Europe’s periphery has eased, German growth has strengthened. The Economy Ministry said on Aug. 9 that the region’s biggest economy expanded “markedly” in the second quarter, driven by private consumption and industrial production.

Chancellor Angela Merkel will seek a third term as German leader on Sept. 22 on the strength of shielding her country from the worst effects of the euro area’s debt crisis. The Federal Statistics Office will release second-quarter GDP data before the euro-area number on Aug. 14.

Financial markets have largely avoided the volatility that marked previous years even as a change in Italy’s government stalled, Portugal’s coalition faltered, and Cyprus required a messy bailout. Draghi has cited the ECB’s unlimited bond-buying pledge, announced last year and so far untapped, as a reason for calmer markets. Yields on Spanish and Italian sovereign bonds have fallen in the past 12 months.

‘Not Overly Bullish’

“It all looks a bit better than we thought,” said Evelyn Herrmann, an economist at BNP Paribas SA in London. “Our central case is a very modest recovery, and we’re still not overly bullish for the second half of the year.”

Greece’s economy contracted for a 20th quarter, extending an economic slump that has left more than six in 10 young Greeks out of work, the Athens-based Hellenic Statistical Authority said today.

Gross domestic product shrank 4.6 percent in the three months through June from the same period last year after dropping 5.6 percent in the previous quarter. That’s better than the median estimate of a 4.9 percent contraction in a Bloomberg News survey of six economist. Greece doesn’t publish seasonally adjusted or quarter-on-quarter GDP data.

Lending Decline

One area of stress remains corporate access to credit. Lending to companies and households across the region fell the most on record in June. A review of banks’ balance sheets to be conducted by the ECB has probably been delayed until the first quarter of 2014 as the central bank says it can’t start preparing until EU lawmakers vote on the legislation, which won’t be before September.

The review is part of a plan to strengthen the region’s financial system by building a banking union comprising ECB oversight, a single resolution mechanism for winding up failing lenders, and common rules for deposit guarantees.

In the meantime, economic performance remains patchy. An unexpected 1.4 percent drop in French industrial production in June underlined the government’s struggle to revive growth in the region’s second largest economy. France is also due to release data for second-quarter GDP on Aug. 14.

“Talk of an economic recovery, to say nothing about a sustainable one, when domestic demand is still contracting, government debt levels continue to surge and the economic and institutional reform agenda is unraveling, is wide of the mark,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Germany may be pulling ahead, but the bloc’s other main economies, including France, remain in dire straits.”

Improving Indicators

The euro area’s path out of recession will also be determined by conditions in major export markets such as the U.K., the U.S. and China. There, indications are improving.

In China, July industrial output rose more than expected after a larger-than-forecast rebound in exports eased concern that a credit squeeze in the world’s second-biggest economy would curb growth. The U.S. economy grew at a 1.7 percent annualized rate from April through June after a 1.1 percent pace in the first quarter.

For the whole of 2013, the ECB forecasts a contraction for the euro-area economy of 0.6 percent, before an expansion of 1.1 percent in 2014.

“There’s still some fiscal adjustment going on and that’s weighing on consumption, as well as banks in the south not being in a position to support the economy,” said Laurence Boone, chief European economist at Bank of America Merrill Lynch in London. “The consensus is for slight growth and we wouldn’t expect anything much more buoyant than that.”

To contact the reporter on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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