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Thursday, August 14, 2014

German Slump, Stagnant France Paint Dismal Eurozone Picture

By Michelle Martin and Ingrid MelanderBERLIN/PARIS (Reuters) - Germany's economy shrank in the second quarter and France again managed to conjure up no growth, data showed on Thursday, snuffing out any signs of a recovery in the euro zone which is now weighed down by tit-for-tat sanctions with Russia.Europe's largest economy contracted by 0.2 percent on the quarter, undercutting Bundesbank forecasts that it would stagnate, with foreign trade and investment notable weak spots, the Statistics Office said.With so much uncertainty surrounding Russia and Ukraine, a quick rebound is unlikely.France fared little better, flatlining for the second successive quarter.That forced the French government to confront reality, saying it would miss its budget deficit target again this year and cutting its 2014 forecast for 1 percent growth in half.The GDP number for the euro zone as a whole is due at 0900 GMT (5.00 a.m. EDT) and forecast to show anaemic growth of 0.1 percent on the quarter. Given the reports from member states already in, even that is unlikely to be achieved.Data over the past couple of weeks have shown previously beleaguered Spain setting the pace, growing by 0.6 percent, a pace none of its peers are likely to better.Italy, the euro zone's third largest economy, pales in comparison and slid back into recession for the third time since 2008 in the second quarter of the year, shrinking by 0.2 percent and pressuring Prime Minister Matteo Renzi to complete promised structural reforms.Rome and Paris have led a drive to focus EU policy more on jobs and growth rather than cutting debt. Germany and others have shown they will only tolerate that debate up to a point.Bundesbank chief Jens Weidmann said on Wednesday that euro zone monetary policy should not aim to weaken the euro and individual member states should take steps to boost growth, rebuffing French calls for Germany and the European Central Bank to do more.A Reuters poll of economists conducted over the past week gave only a 15 percent chance that the ECB will start printing money this year but put the chances at one-in-three in 2015."European policies must be refocused by adapting the pace of deficit reduction to the current economic environment," French Finance Minister Michel Sapin wrote in French daily Le Monde.There was no mention of the 2015 goal when France's public deficit is due to come into line with the EU's cap, namely 3 percent of GDP. Sapin said Paris would cut its deficit "at an appropriate pace".Q3 ANY BETTER?The worry for the currency club is that sanctions imposed on Russia over the Ukraine crisis, and Moscow's retaliation in banning most Western food imports, are likely to act as a further drag on growth.Survey evidence for the third quarter suggests hopes for a rebound from a dismal Q2 are now under threat.The ZEW economic sentiment index, released on Wednesday, showed German analyst and investor morale plunged in August to its lowest level in more than 1-1/2 years."Downside risks heading into Q3 have intensified ... mainly due to the intensification of geopolitical tensions, the outlook for exports to Russia in view of the potential effects of sanctions on Russia on Russian growth and the effect of heightened uncertainty," said Evelyn Herrmann, economist at BNP Paribas.Greece, the crucible of the euro zone debt crisis, is showing some signs of improvement, contracting in the second quarter at its slowest annual pace since late 2008, supporting expectations that Athens will emerge from the six-year slump this year.Athens has also managed to run a bigger primary surplus - before debt interest payments - and will seek some sort of debt relief later this year to put itself on a sustainable path.Finland reported growth of 0.1 percent on the quarter.(Writing by Mike Peacock; Editing by Mark Trevelyan)Join the conversation about this story »


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