Eurozone edges back towards recession

The eurozone edged closer towards its second recession in three years after a resilient economic performance from Germany and France failed to prevent the single currency bloc from contracting in the second quarter.

Gross domestic product in the euro area shrank 0.2 per cent in the three months to June, compared with the previous three months when there was no growth, as the economies of Greece, Italy, Spain and Finland contracted sharply.

“[The contraction] confirmed that the eurozone is to all intents and purposes in recession, even if it has avoided the technical definition of two successive quarters of negative quarter-on-quarter GDP,” said Howard Archer, chief European at IHS Global Insight.

Robust investment and domestic consumption helped the German economy expand 0.3 per cent in the second quarter, beating expectations of just 0.1 per cent growth, while French GDP remained unchanged avoiding a highly anticipated contraction. The Netherlands also outperformed forecasts, growing 0.2 per cent.

But a 1 per cent fall in economic output in Finland, a close ally of Germany in the battle for greater austerity in Europe, illustrated how the sovereign debt crisis that has been troubling southern Europe is spreading to the bloc’s economically stronger core northern states.

Economists warned that the resilience displayed by Germany and France was not sustainable and output was likely to drop sharply in coming months.

The eurozone emerged from recession in the third quarter of 2009 but growth turned negative in the final quarter of 2011. In the first quarter of this year output remained unchanged — defying fears of a recession. However, after falling into negative territory in the second quarter it is expected to stay negative in the current quarter, resulting in another technical recession.

Joerg Kraemer, chief economist at Commerzbank in Frankfurt, said that he expected the German economy to contract in the third quarter, as domestic and foreign demand slows significantly.

“The German economy 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,” said Mr Kraemer.

But the better than expected preliminary data from Germany and France gave a boost to stock markets. FTSE Eurofirst 300 enjoyed a gain of 0.6 per cent and the euro added 0.1 per cent to $1.2348.

Pierre Moscovici, France’s finance minister, welcomed the news that the eurozone’s second-largest economy had avoided recession, despite warnings last week from the Bank of France that it would contract. But he said three successive quarters of zero growth was “not excellent ... it’s zero growth so therefore it’s too weak”.

He also acknowledged that the 2013 growth target of 1.2 per cent would require a huge effort to fix the economy and restart growth.

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Greece’s economy has been the worst hit. Its economy shrank at an annualised pace of 6.2 per cent in the second quarter, as Athens struggled to reignite investment and consumption due to strict austerity measures imposed by the EU in exchange for bailouts.

Meanwhile, Italy’s economy contracted by 0.7 per cent quarter on quarter, extending the country’s year-old double-dip recession.

Additional reporting James Boxell in Paris