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Eurozone economy shrinks amid recession fears

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The eurozone's debt-ravaged economy shrank in the second quarter, despite continued growth in Germany, which economists said also could soon start to decline.

The 17-nation bloc contracted by 0.2 per cent, according to data released on Tuesday. Germany was one of the few bright spots, eking out 0.3 per cent growth, marginally beating forecasts.

But estimates of its future growth slid for a fourth straight month, and economists said that even Europe's largest economy is unlikely to defy gravity for long unless decisive action is taken to tackle the eurozone'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, an analyst 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."

'North-south divide'

The Netherlands posted a small growth of 0.2 per cent, while France, Europe's second-largest economy, posted its third consecutive quarter of zero growth.

The central bank in Paris has already said it expects a mild contraction in the third quarter.

"These figures are not excellent, but at the same time France is not in recession while the majority of its European partners are," French finance minister Pierre Moscovici told Europe 1 radio.

Several other countries in northern Europe, including Belgium and Finland, also saw their economies shrink.

Those anaemic results were still better than in debt-riddled southern Europe. Greece's economy continued its freefall, posting a 6.2 per cent contraction, after losing 6.5 per cent in the first quarter.

Economists say the slump will persist as the government scrambles to secure billions in additional cuts to keep bailout funds flowing.

Spain's economy lost 0.4 per cent, and Italy's 0.7 per cent. Bailed-out Portugal's recession deepened, with GDP diving by 1.2 per cent on the quarter, and Cyprus contracting by 0.8 per cent.

"The slowdown has spread from the periphery into the core," said Tom Rogers, an analyst with Ernst & Young in London, one of many to highlight a systemic "north-south divide".

Recession fears

The most recent forecast released by the European Commission, in May, anticipates growth of one per cent for the eurozone next year.

But economists expect the eurozone's economy will continue to worsen, with many predicting an overall contraction in 2013.

The latest estimates from the EU underscore how Europe is lagging well behind its main economic and trade rivals and partners, with comparative figures saying GDP rose by 2.2 per cent quarter-on-quarter in the US and 3.6 per cent in Japan.

"Only once the eurocrisis is back under control can a rebound in investment lead to a return to trend growth in core Europe," said Christian Schulz of Berenberg Bank.

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.

Angela Merkel, the German chancellor, has said repeatedly over the past year that she will do everything to save the euro, most recently after the European Central Bank 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.


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