Euro zone output expected to shrink in Q2

Mon Aug 13, 2012 7:01pm EDT

* Germany expected to grow, but not enough to offset
declines
    * Business and consumers slow spending in euro zone crisis

    By Ben Deighton
    BRUSSELS, Aug 14 (Reuters) - Euro zone output is seen
declining in the second quarter when the European Union releases
data on Tuesday, as the debt crisis hurts confidence, making
businesses reluctant to invest and consumers worried about
spending.
    Gross domestic product (GDP) in the zone likely shrank 0.2
percent from the first quarter of the year, according to an
average of estimates of 55 economists polled by Reuters. The
most pessimistic forecast a contraction of 0.7 percent.
    The downturn comes amid political events that have further
rattled the continent. In June, the success of anti-bailout
parties in the run up to a Greek vote raised the spectre of it
leaving the euro zone. Spain rescued the struggling lender
Bankia, increasing worries over the euro zone's
fourth-largest economy.
    "That really shattered consumer and business confidence,"
said Martin van Vliet, an economist at ING.
    The euro zone's output stabilised in the first quarter, but
a decline in the second quarter would put the region on course
for a recession if output in the current, third, quarter also
shrinks.
    "We think that the stabilisation in the first quarter was
just a temporary stabilisation and that the underlying story is
just one of ongoing recession," said Aline Schuiling, and
economist at ABN AMRO. "All the data are in line with a mild
recession."
    As well as an estimate for the euro zone as a whole from the
European Commission's statistics office, national GDP data are
also expected on Tuesday from France, Germany, Portugal and the
Netherlands.
    In Belgium, the first main economy in the zone to report,
GDP shrank 0.6 percent, the central bank said at the start of
August. That was more than double the worst estimate of
economists polled by Reuters beforehand. 
    Only Germany, the euro zone's largest economy, is expected
to grow, with 46 economists polled expecting on average a 0.2
percent rise in output.
    Germany has benefited from growing exports to Asia and
falling unemployment, providing a good export market for
struggling euro zone countries like Spain, however that will not
be enough to make them grow.
    "That has a positive effect on Spain, but Spanish exports
are only about 30 percent of GDP so the rate is too small to
offset the contractionary effect of domestic spending which is
really plummeting," said van Vliet.
    EU leaders have been struggling to find ways to fix the
nearly three-year-old debt crisis, which now threatens Italy and
Spain, as well as Greece.
    At the end of June they empowered their rescue fund to
inject aid directly into stricken banks from next year and
intervene on bond markets to support troubled member states.
 They also pledged to create a single banking
supervisor for euro zone banks based around the European Central
Bank - a first step towards a European banking union that could
help shore up Spain. 
    In addition, ECB President Mario Draghi agreed earlier in
August to intervene in bond markets if countries first apply for
aid from the European bailout funds. 
    However, investors are still demanding interest rates close
to 7 percent to hold Spanish 10-year bonds, a
level at which other countries have had to consider seeking a
bailout. And the bloc's politicians still have to figure what to
do if Spain or Italy were to topple.
    "As long as the euro crisis is not really resolved, we can
all debate about GDP, but we need this crisis to be resolved
before we can start to talk about sustainable recovery," said
ING's van Vliet.
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