Eurozone gloom is being compounded by a marked slowdown in growth across the region, with even Germany’s economy losing momentum.
Gross domestic product data for the three months to June, to be published on Tuesday, are expected to show the eurozone has not escaped the soft patch hitting other parts of the world – adding to the difficulties facing its policymakers as they combat the region’s escalating debt crisis.
Failure to calm financial market nervousness could further cloud the economic outlook, economists warned. “The longer it takes the bigger the risk that the impact becomes more meaningful,” said Dirk Schumacher at Goldman Sachs in Frankfurt.
So far this year, robust German growth – boosted by its engineering exports to fast-growing countries such as China - has lifted prospects across the 17-country region. But economic confidence had already been hit badly in the eurozone “periphery” countries that have borne much of the brunt of the crisis.
The dangers for the eurozone in coming months are twofold: first, that sentiment collapses the eurozone “core” – including Germany – deterring investment and job creation; second, that tensions in financial markets and weaknesses in the banking system feed into a “credit crunch” that further crimps economic growth.
After data last week showing French economic growth was flat in the second quarter, economists expect Tuesday’s figures to show eurozone GDP rose only by about 0.2 per cent or 0.3 per cent compared with the previous three months. The first quarter had seen an exceptional 0.8 per cent growth spurt.
As well undermining confidence across the eurozone, weaker-than-expected data would intensify worries about eurozone “periphery” countries falling into a downward spiral, in which weak or negative growth hits government finances, exacerbating their debt problems.
There could be some bright spots, however. Germany’s economy is entering a slower growth phase in strong shape. In the first three months of this year, German GDP expanded by 1.5 per cent. But the exceptional pace of growth was partly due to catch-up effects after bitter winter weather, and was never likely to be maintained. Even a slowdown to 0.5 per cent or 0.4 per cent growth in the second quarter, as forecasts by economists, would remain strong by continental European standards.
German industrial production held up in the second quarter, even if orders data pointed to lower growth in subsequent quarters. At the same time, German businesses were - and remain - upbeat about their operating environment. The July Ifo business survey showed their assessment of the current business situation still near a record high. The DIHK association of German chambers of commerce reported on Monday that small- and medium-sized companies expected to create up to 300,000 jobs in coming months.
German employment and unemployment trends could prove crucial. Over the past two years, the country’s jobless total has fallen steadily to the lowest for two decades. In turn, that has help support domestic demand and reduced dependence on exports to power growth.
German jobless totals could continue to fall during 2012, according to forecasts by Commerzbank. But the eurozone debt crisis still poses a significant danger. “The situation in Germany is all right for now - it is a slowdown to a normal rate of growth but still one that is above the long term potential rate for Germany,” said Jörg Krämer, chief economist at Commerzbank . “The risk for Germany - and the eurozone - is that the sovereign debt crisis becomes a Lehman Brothers type shock.”
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