The euro area’s recovery unexpectedly stalled in the second quarter as its three biggest economies failed to grow, underlining the vulnerability of the region to weak inflation and the deepening crisis in Ukraine.
Gross domestic product in the three months through June was unchanged from the first quarter, when it increased 0.2 percent, Eurostat, the European Union’s statistics office in Luxembourg, said today. The median of 37 forecasts in a Bloomberg News survey was for growth of 0.1 percent. In a separate report, the agency confirmed inflation at 0.4 percent in July.
Economic stagnation, consumer-price growth at less than a quarter of the European Central Bank’s goal and escalating international sanctions against Russia over its support for rebels in Ukraine highlight the challenges policy makers face. ECB President Mario Draghi committed last week to build on the unprecedented stimulus unveiled in June if the outlook deteriorates.
“With the geopolitical tensions not cooling down for the time being, there is little likelihood that the growth pace will accelerate in the second half of the year,” said Peter Vanden Houte, chief euro-area economist at ING Groep in Brussels. Yet, the ECB is likely to “stand pat for the remainder of the year. Big decisions on more unconventional policy measures will have to await 2015,” he said.
Having led the bloc out of its longest-ever recession last year, Germany’s economy shrank 0.2 percent in the second quarter, its first contraction since the start of 2013, while France unexpectedly stagnated, data showed today. Italy succumbed to its third recession since 2008, with GDP falling 0.2 percent in the April-June period.
At the same time, the Spanish economy expanded at the fastest pace since 2007, and the Netherlands and Portugal returned to growth. GDP also increased in Belgium, Estonia, Latvia, Lithuania, Austria, Slovakia and Finland, Eurostat said. The euro-area economy grew 0.7 percent in the year.
German and French bonds rose today with 10-year yields of both nations’ debt falling to record lows, extending a rally fueled by bets on more central-bank stimulus. The euro was little changed after the report and traded at $1.3384 at 11:25 a.m. Frankfurt time, up 0.1 percent from yesterday. The Stoxx Europe 600 index is down 0.2 percent at 329.42.
GDP data come two months after the ECB resorted to targeted long-term loans and a negative deposit rate to bolster growth, lending and inflation. Consumer prices rose 0.4 percent in July from a year earlier, compared with policy makers’ goal of just under 2 percent.
The ECB predicted in June that the euro-area economy would expand 1 percent this year and 1.7 percent in 2015. Last week, Draghi said risks to the outlook are increasing because of conflicts such as the Ukraine crisis, and held out the prospect of new unconventional tools such as purchases of asset-backed securities and large-scale quantitative easing. New forecasts are due next month.
“There’s a big chance they will have to revise their growth and inflation figures in September,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. “The ECB is in a tough position” and today’s data “certainly raise the pressure again” to increase stimulus, he said.
The European Union has agreed to curb Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet, eroding confidence in the region’s recovery.
German investor confidence fell in August to the lowest level since 2012, and the country’s Economy Ministry said last week that geopolitical tensions “more than anything led to a clear reticence in orders” at the end of the second quarter.
Henkel AG, the German maker of Persil laundry detergent, said on Aug. 12 that earnings growth will slow in the second half as Russia’s dispute with Ukraine and military battles in the Middle East harm business. Schlumberger Ltd., the world’s largest oilfield services provider based in Paris and Houston, sees Russian sanctions on technology including fracking and deep-water drilling impacting its third-quarter earnings.
Weak performance in the second quarter prompted French Finance Minister Michel Sapin to scrap this year’s growth forecast. The region’s second-largest economy will expand 0.5 percent in 2014 instead of 1 percent announced previously, he said on Europe 1 radio today. This year’s deficit will exceed the limit of 4 percent of economic output agreed with the European Commission, he added.
The Ukraine crisis is also weighing on the economies of eastern Europe. The Czech Republic unexpectedly stagnated last quarter and Romania’s economy shrank 1 percent, data showed today. Polish growth slowed to 0.6 percent from 1.1 percent, and Hungary’s expansion cooled to 0.8 percent from 1.1 percent, while still beating estimates.
Jens Weidmann said in an interview with Phoenix TV this week that the Bundesbank, which he heads, is “more or less sticking” with its forecasts for German growth of 1.9 percent this year and 2 percent in 2015, and sees the “relatively positive basic trend” continuing despite the risks.
Manufacturing and services activity in the country and the euro area picked up in July, according to surveys of purchasing managers, and unemployment in the region continues to decline.
“I’m personally optimistic that the cyclical upswing in the euro area will continue,” said Karsten Junius, chief economist at Bank J Safra Sarasin AG in Zurich. “The things like geopolitics that are weighing on sentiment are going to have little quantitative impact.”