By William Horobin And Todd Buell

Germany's economy contracted while France's stagnated in the second quarter, indicating the euro zone's yearlong recovery may have stalled, and likely pressuring policy makers to come up with some new ideas for boosting growth.

The euro zone's largest economy contracted 0.2% in the three months to June, Germany's federal statistics office said, the first decline in output since the start of 2013. Compared with the second quarter of 2013, output was up 1.2%. Economists polled by The Wall Street Journal last week said they expected the economy to shrink 0.1% on the quarter and grow 1.4% in annual terms.

Destatis said that net trade was a drag on growth, as import growth outpaced exportgrowth. Construction investment declined, but Destatis said this was due to projects being pushed forward because of the unusually mild winter. Both private and public consumption rose compared with the first quarter, the statistics office said.

Earlier on Thursday, figures from France's statistics agency showed the euro zone's second-largest economy failed to record any growth for the second successive quarter in the period April through June. Economists polled by the Journal had expected a 0.1% expansion in gross domestic product in the second quarter from the first. Compared with the same period of 2013, GDP was up just 0.1%.

Figures published earlier this month showed Italy's economy also contracted in the second quarter, by 0.2%. The data released Thursday mean that none of the euro zone's three largest economies--which account for two thirds of the currency area's output--expanded in the three months to June, making it unlikelythat the euro zone as a whole managed to generate any growth.

The euro held steady at $1.3356 following the data releases. German 10-year Bund yields hit a record low of 1.016%. Yields fall as prices rise.

The weak recovery leaves the currency bloc lagging other advanced economies such as the U.S. and the U.K. The sluggishness is keeping unemployment high and inflation low, increasing pressure on the European Central Bank to lower its outlook for economic growth and take more action to bring inflation closer to its 2% target from around 0.4% currently.

In France, poor second-quarter growth has upended the government's plans to bring down its deficit, only a month after Paris adopted a revised budget to try and stay on track.

Mr. Hollande's government had been banking on 1% growth this year to bring the deficit down to 3.8% of GDP. But in an editorial published in Le Monde on Thursday, French Finance Minister Michel Sapinwrote that the economy is now likely to grow just 0.5% this year, and by no more than 1.0% next year.

Mr. Sapin acknowledged that the government won't meet its budget deficit target.

"It is better to admit what is than to hope for what won't be," Mr. Sapin wrote in the editorial.

Weak growth combined with low inflation will drag on tax revenue and swell the size of deficits relative to the size of the economy, the minister said. France's budget deficit will be over 4% of economic output this year instead of falling to 3.8% from 4.3% last year, he added.

The euro-zone economy's disappointing performance in 2014 will likely fuel a more intense debate about the wisdom of pursuing austerity programs aimed at cutting government borrowing.

France wants to change European policy to adapt deficit reduction to the current economic situation, Mr. Sapin said.

"Europe must take firm, clear action by deeply adapting its decisions to the particular and exceptional situation of our continent," Mr. Sapin said.

The ECB is also likely to come under pressure to do more to boost growth, having as a recently as June cut its key interest rates and launched a new program of cheap loans to banks that are intended to be passed on to businesses.

Mr. Sapin said the ECB must also go to the limits of what is possible so that the euro "returns to a level that is more favorable to the competitiveness of our economies."

Although it remains the weakest part of the global economy six years after the onset of the financial crisis, the euro zone isn't alone in confronting weak and uneven growth. Japan on Wednesday reported its economy contracted at an annualized rate of 6.8% in the second quarter following a strong first quarter inspired by an impending increase in the sales tax. The U.S. returned to growth in the second quarter after a disappointing, weather-affected first three months of the year, while China has resorted to a variety of stimulus measures to shore up flagging growth, registering a pickup in its year-to-year expansion to 7.5% in the second quarter from 7.4% in the first.

Write to William Horobin at William.Horobin@wsj.com and Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

August 14, 2014 03:16 ET (07:16 GMT)

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