Eurozone Contracts Slightly In Q2; Germany, France Grow

The Eurozone economy contracted slightly in the second quarter even as Germany and France emerged out of recession, giving positive signals of an early recovery in the single-currency area from a deep recession.

The flash estimate from the Luxembourg-based Eurostat showed that the euro area shrank 0.1% sequentially in the second quarter. This was much slower than the 2.5% decline seen in the first quarter and an expected 0.5% contraction. But, the gross domestic product continued the stretch of fall that began in the second quarter of 2008. The sequential decline reported in the first quarter was the most since records began in 1995.

Year-on-year, the seasonally adjusted GDP dropped 4.6% compared to first quarter’s 4.9% fall. The second quarter decrease was also smaller than the expected 5.1% decline.

The report further showed that EU27 GDP dropped by a quarterly 0.3%, much smaller than the 2.4% decline in the first quarter. By contrast, annual contraction was slightly faster, down 4.8% annually compared to 4.7% fall in the previous quarter.

The Eurostat is slated to release the detailed GDP report on September 2.

During the second quarter, Eurozone’s economic performance was better than that of U.S. The world’s largest economy shrank 0.3% sequentially after falling 1.6% in the first quarter. U.S. GDP was down 3.9% annually.

Among the major eurozone economies, Germany and France clearly emerged out of recession in the second quarter. The largest in the group, Germany, unexpectedly expanded 0.3% sequentially in the second quarter, which was the first growth since the first quarter of 2008. Household and government final consumption expenditure and capital formation in construction made positive contributions to the rebound.

Meanwhile, the French economy surprisingly grew 0.3% in the second quarter on higher government spending and global demand, ending four straight quarters of economic contraction.

Commerzbank analyst, Christoph Weil said the main reasons behind the stabilization of region’s economy are strengthening global demand and rising confidence in the economy which resulted in the implementation of investment plans by companies. Also, measures adopted across the region to boost consumption, especially the new-for-old car subsidies produced desired effect.

Among other eurozone members, Portugal GDP increased 0.3% sequentially in the second quarter, compared with a 1.8% fall in the previous quarter. Greece GDP grew 0.3% in the second quarter, after falling 1.2% in the first quarter.

Not all the nations have emerged from recession in the euro area. Italian GDP fell 0.5% in the second quarter following a 2.7% drop in the first three months of the year. Cyprus’s economy also slipped 0.5%, while Austrian GDP declined 0.4%. The Dutch economy shrank for the fifth straight quarter on exports, shrinking 0.9% versus 2.7% in the first quarter.

The second quarter GDP data is due from Spain on August 14.

Weil said Spain, Netherlands and Italy would be trailing the field in the second half as well.

The European Central Bank’s Monthly Bulletin said economic activity over the remainder of this year is expected to remain weak. Looking ahead into next year, after a phase of stabilization, a gradual recovery with positive quarterly growth rates is expected, the latest bulletin for August revealed.

On August 6, the ECB had left its key interest rate, which is the interest rate on the main refinancing operations, untouched at a record low of 1%. The bank has lowered the key interest rate by a total of three and a quarter percentage points since early October 2008.