Shrinking Fortunes Euro Zone's Economy Contracts by 0.2%, Germany's by 0.5%

The euro zone economy shrank during the second quarter, with a decline in GDP in Germany weighing down the currency bloc. Germany doesn't appear to be headed into a recession yet, but other European countries are already technically there.


Cranes over Berlin's Museum Island complex: A dearth of construction projects is dampening the German economy and that of the euro zone.
DDP

Cranes over Berlin's Museum Island complex: A dearth of construction projects is dampening the German economy and that of the euro zone.

The euro zone economy contracted by 0.2 percent during the second quarter, according to figures released Thursday by the official European Union statistical agency in Brussels. The news came on the same day Germany, Europe's largest economy, announced its economy had shrunk by 0.5 percent between April-June. Both France and Italy have announced a drop in growth of 0.3 percent.

In Germany and across the euro zone, analysts attributed stalled economic growth to a lack of investment by companies, a slowdown in construction projects and shrinking consumer spending power in the face of the economic fallout from the US subprime mortgage crisis and fast-rising energy and food prices that have sparked the highest inflation seen in Europe in 16 years.

Inflation in the 15-nation euro zone, where Europe's common currency is used, held steady at 4 percent in July, slightly lower than the anticipated 4.1 percent. But that figure is still double the 2 percent guideline recommended by the European Central Bank (ECB), increasing worries of the phenomenon of stagflation across Europe. In June, the bank increased its key interest rate from 4 percent to 4.25 percent in order to try to put the brakes on surging inflation.

So far, no euro zone countries have fallen into a recession -- indeed, Thursday's figures still marked a 1.5 percent increase in euro zone GDP over the second quarter last year. But no figures were supplied for Ireland on Thursday, which had negative growth during the first quarter. Within the greater 27-member EU, growth fell by 0.1 percent during the second quarter. The only EU member states currently suffering a technical recession are Baltic tiger Estonia and Denmark. Estonia has seen its former fast growth pattern stalled and recorded a 0.9 percent decline in GDP during the second quarter and 0.5 percent during the first; and Denmark fell into a recession during the fourth quarter of 2007. Latvia currently appears on the path towards recession, too.

Germany's First Second-Quarter Drop Since 2004

In Germany, the 0.5 percent fall in gross domestic product was lower than the 0.9 percent drop economists had forecast. Nevertheless, it marked the first second quarter economic decline in Germany since 2004. During the first quarter, the German economy grew slightly, by 1.3 percent.

In total, the German economy grew by 3.1 percent during the past year, but when adjusted for the number of working days, economic growth was only 1.7 percent. Economists had expected adjusted figures of 1.6 percent.

The Federal Statistical Office said foreign trade in Germany, the world's largest exporter, had made a "positive contribution," but mostly because of a significant decrease in imports. But exports weren't enough to offset tighter consumer pocketbooks and the hesitance of companies to make investments.

Most analysts believe the economy will continue to be weak in the coming months. And last week ECB President Jean-Claude Trichet warned that growth in Europe was likely to be "particularly weak" during the third quarter.

Germany's central bank, the Bundesbank, along with the country's leading economics institutes, are still predicting growth of up to 2 percent for 2008. But they warn that growth could halve in 2009 if current trends continue. With analysts expecting a small rise in GDP during the third and fourth quarters, they say it is unlikely Germany will fall into a recession this year.

In 2007, the economy here grew by 2.5 percent; and the year before it grew by 3 percent.

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