Last updated: August 14, 2014 6:48 pm

Eurozone economy fails to grow in second quarter

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The eurozone’s economic recovery has shuddered to a halt, bolstering calls for the European Central Bank to take aggressive measures to boost growth and halt a slide towards deflation.

Gross domestic product was flat in the second quarter of 2014, compared with growth of 0.2 per cent in the previous three months, according to official figures released on Thursday. Inflation fell to a four-and-a-half-year low of 0.4 per cent in July.

Dismal performances from Germany, France and Italy – the core of the single-currency region – were responsible for the stagnation, while parts of the periphery beat expectations.

German 10-year Bund yields dipped below 1 per cent for the first time on speculation that the ECB would follow the lead of the US Federal Reserve and the Bank of England by introducing a programme of large-scale bond purchases to boost the region’s economy.

Expectations of action by the ECB also pushed down the cost of borrowing across the eurozone, with 10-year yields in Belgium and Ireland falling to record lows. However, monetary policy makers are not expected to act until the end of this year at the earliest.

“It’s time the ECB took control and we got the real deal, instead of the weaker measures unveiled in June,” said Richard Barwell, European economist at Royal Bank of Scotland.

Germany joins a handful of countries whose bonds have entered this territory, including Japan, which has struggled to exit more than a decade of deflation. Eurozone inflation of 0.4 per cent last month is less than a quarter of the ECB’s target of “below but close to” 2 per cent.

“The ghost of Japan is hovering over markets and will be for the coming months,” said Simon Fasdal, head of fixed income trading at Saxo Bank. “It puts markets in a mode where they will doubt positive developments. We are very close to a very serious story.”

Germany GDP

Escalating geopolitical tensions with Russia damaged confidence in Germany, contributing to a 0.2 per cent fall in economic output – the first contraction since the end of 2012. The German economy accounts for almost 30 per cent of eurozone GDP.

France’s economy stagnated, while Italy has fallen into its third recession since 2008, meaning none of the eurozone’s three biggest economies registered any growth in the second quarter.

The Dutch economy grew 0.5 per cent after contracting between January and March, while Portugal and Spain expanded by 0.6 per cent.

While the US and UK have surpassed their pre-crisis peaks, the currency bloc’s economy is still smaller than before the collapse of Lehman Brothers almost six years ago.

The gloom threatens to intensify the debate in Brussels over the need for government reforms after France declared it would miss its deficit target, and contrasts with optimism in other advanced economies.

The disappointing figure for France means Paris will miss its budget deficit this year of 3.8 per cent of economic output, an important stepping stone to meeting the EU-mandated level of 3 per cent. It has already received one extension to meet the target. Michel Sapin, finance minister, told Le Monde newspaper that GDP would come in at 0.5 per cent this year, half of the government’s earlier forecast.

Mr Sapin said the harder times underscored the need to rethink European targets.

France GDP

“European policies must be refocused by adapting the pace of deficit reduction to the current economic environment,” he said.

“For Germany, [the data] are a strong reminder that too much economic complacency can easily backfire,” said Carsten Brzeski, an economist at ING.

Bruno Cavalier, chief economist at Oddo & Cie Bank in Paris, said that what most worried him about the latest data was investment, which contracted 1.1 per cent during the quarter. For companies, investment contracted 0.8 per cent, notching up a 10th consecutive quarter of negative growth. Household investment shrank 2.4 per cent.

“Confidence is completely absent today both on the business and household side,” he said. “I don’t see anything that would change this in the near future.”

Additional reporting by Jamie Chisholm in London

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Letter in response to this report:

The councils that gum up the works / From Mr John Barstow

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