Europe GDP surprise, Fed boost global pickup hopes

BRUSSELS/BERLIN (Reuters) - Western Europe’s biggest economies reported a surprise return to growth on Thursday after the Federal Reserve had said the U.S. recession may be ending, although fears of Japan-style stagnation persist.

Germany’s and France’s unexpected rise in second quarter GDP, coupled with the Fed’s muted optimism on Wednesday, boosted financial markets which are still fretting over whether any global economic pickup is for real.

German Economy Minister Karl-Theodor zu Guttenberg, mindful that economies can dip back into recession, was cautious. “The figures should encourage us,” he said. “However, there are no grounds for euphoria, because we’re still a long way from seeing the economy back at the level that it was at last year.”

Any recovery will be patchy at best and some leading countries in eastern Europe, which rely heavily on exporting to the wealthier west, reported a far gloomier outlook.

GDP in the euro zone still shrank in the second quarter, albeit less than originally expected at 0.1 percent, but the two biggest economies delivered the big surprise.

Germany and France both emerged from lengthy recessions in April-June with their gross domestic product rising 0.3 percent quarter-on-quarter, while the much smaller Portuguese and Greek economies matched that.


Germany goes to the polls next month and unemployment is high, although it fell in July for the first time in nine months. Some economists were more upbeat.

“It looks like the recession’s over. We’re entering a phase of stabilization and slow growth,” Christian Dreger at the DIW institute. “The main risk for Germany is a sharp rise in unemployment.”

In the United States, the Federal Reserve said on Wednesday the economy was showing signs of leveling out.

The U.S. central bank also kept its benchmark short-term interest rate steady near zero and said it would probably stay there for an extended period to guide the way to recovery.

“Information since the Federal Open Market Committee met in June suggests economic activity is leveling out,” the Fed said. “Conditions in financial markets have improved in recent weeks.”

This was the first time since August 2008 that its statement has not characterized the economy as contracting, weakening, or slowing.


Stocks, commodities and the euro rose due to the GDP surprise, while the dollar dipped after the Fed’s less gloomy outlook. The euro climbed 0.4 percent to $1.4262 and was up 0.9 percent against the yen at 137.60.

The dollar drifted lower as investors switched to riskier assets such as commodities. It was down a quarter percent against a basket of major currencies. World stocks as measured by MSCI were up 0.8 percent.

In Germany confidence remains shaky. “There are lots of problems we haven’t solved,” said Jens-Oliver Niklasch at LBBW. “As long as it’s not clear that the banks’ capital base is robust, we can’t assume that the crisis is over. We can’t forget what happened in Japan.”

Japan’s failure to get to grips with its own banking crisis dating from the 1980s led to a “lost decade” of stagnation marked by periodic dips into recession.

However, Japan is also expected to report an upturn next week. A Reuters poll of economists showed its economy probably grew steadily in April-June, thanks to a pickup in exports and personal consumption spurred by stimulus spending.


European recovery is far from even. Britain, Italy and the Netherlands remain in recession and to the east, conditions also remain weak.

The collapse in euro zone demand for the cars and electronics produced in central and eastern Europe has cast almost all of the region into a deep plunge, with only Poland seen as potentially escaping contraction this year.

Hungary’s economy shrank a record 7.6 percent from a year earlier in the second quarter as industry continued to struggle and agriculture suffered.

In Romania, the economy fell 8.8 percent, in an acceleration from the 6.2 percent fall in the first quarter, cementing expectations of further monetary easing.

“The (Hungarian) recovery ... is likely to remain extremely slow,” said Mariann Trippon, analyst at CIB Bank.

Writing by David Stamp; Editing by Anthony Barker