August 15, 2012
Europe's perilous adventure look set to continue.
The eurozone is on the brink of following Britain into a double-dip recession after its economy shrank between April and June - and it's dragging the rest of the world down with it.
Already debt-ravaged, the euro zone's economy shrank in the second quarter and economists say German growth could soon be snuffed out.
The 17-nation currency bloc contracted by 0.2 per cent on the quarter, data showed on Tuesday. Germany eked out growth of 0.3 per cent, marginally beating forecasts.
Tim Ohlenburg, senior economist at the Centre for Economics and Business Research, said Europe's woes, including plunging business sentiment and weakening trade, are dragging the world economy down.
"The fall in second quarter European output adds to the world economy's downward momentum," Ohlenburg said.
Rachel Reeves, the shadow chief secretary to the Treasury, said Europe's shrinking economy was a worry, but pointed out that only two members of the G20 – the UK and Italy – are in recession.
"These are concerning growth figures, with the eurozone economy contracting in the last quarter. But they also show that despite all the problems in the euro area, France and Germany have so far managed to avoid recession, while Britain has now been in recession for the last nine months."
The eurozone has avoided entering a technical recession, defined as two consecutive quarters of negative growth, because growth was flat over the first three months of 2012.
Economists said worse is likely to come and even Europe's largest economy is unlikely to defy gravity for long unless decisive action is taken to tackle the bloc's debt crisis.
"Growth turned out to be pretty solid. But this could be the last positive piece of news out of Germany for some time," said Joerg Kraemer at Commerzbank. "The German economy could contract in the summer. It is fundamentally in good structural shape, but can't decouple from the recession in the eurozone, plus the global economy has also shifted down a gear."
Aside from a downward blip in the last three months of 2011, the eurozone has posted pretty consistent, albeit anaemic, growth over the past three years although some of its debt-laden members have been in recession for some time.
"Overall it confirms the idea that the eurozone is in a recession phase," Aline Schuiling, economist at ABN AMRO, said.
"What we see is a vicious circle of budget cuts, high interest rates in the periphery and sovereign debt rising," she said. "Policymakers are moving very slowly ... We expect another contraction in Q3."
For France, it was the third consecutive quarter of zero growth. The central bank has already said it expects a mild contraction in the third quarter.
Safe-haven German Bund futures fell and European stocks rose after the slightly stronger than expected German and French GDP reports.
Austria and the Netherlands almost matched Germany's performance, each posting growth of 0.2 per cent. But Finland, one of Germany's northern European allies in pushing for austerity, suffered a 0.7 per cent year-on-year fall in GDP.
EU Economic and Monetary Affairs Commissioner Olli Rehn said the European Union and European Central Bank were ready to act if needed to shore up the currency bloc.
For the countries at the sharp end of the debt crisis, the picture is bleaker still and as economies shrink, so do tax revenues, making deficit-cutting even harder to achieve.
That has fostered a growing debate inside and outside Europe about the sense of austerity drives.
Bailed-out Portugal's recession deepened with GDP diving by 1.2 per cent on the quarter and Cyprus contracted by 0.8 per cent.
Figures released on Monday showed deficit-cutting measures helped to shrink Greece's economy 6.2 per cent year-on-year in the second quarter. Economists say the slump will persist as the government scrambles to secure billions in additional cuts to keep bailout funds flowing.
Italy's second quarter data last week showed the economy contracted 0.7 per cent quarter-on-quarter, compounding the difficulties for Mario Monti's technocrat government as it tries to avoid a bailout.
Spain's economy shrank 0.4 per cent over the same period, pushing it deeper into recession.
The big unanswered question is whether a weakening economy will make Germany, the EU's paymasters, less likely to support government rescue efforts for the broader eurozone.
German Chancellor Angela Merkel has said repeatedly over the past year that she will do everything to save the euro, most recently after the ECB signalled it would intervene in the bond market to lower Spanish and Italian borrowing costs.
Not all Germans support that course and the chancellor's room for manoeuvre appears to be shrinking at a time when both Greece and Spain may soon require new rescues. However, if ordinary Germans start to feel real economic pain, their response could be to demand their leaders sort out the crisis that is now finally knocking at their door.
Christian Schulz, an economist at Berenberg Bank in London, said it was vital to get a grip on the eurozone crisis. "We expect that the ECB has initiated a turning point with its signal of bond purchases," he said. "After a weaker summer the German economy will be able to grow faster again from the fourth quarter."