By Brian Blackstone And William Horobin
FRANKFURT--The euro-zone economy stalled last quarter after 12 months of weak growth, with German output falling more than expected, underscoring concerns that the region is mired in a deep rut of high joblessness and weak consumer prices that could worsen amid tension in Ukraine and the Middle East.
Gross domestic product in the 18-member currency bloc was flat in the second quarter compared with the first, the European Union's statistics office said Thursday. That translated into 0.2% growth in annualized terms, down from the first quarter's 0.8% pace. European equity markets fell and safe-haven government bond markets rallied early Thursday as national figures trickled out in advance of the regionwide figures.
The weak recovery leaves the euro zone lagging other advanced economies such as the U.S. and the U.K., which have experienced firmer, albeit uneven, expansions. Those economies have recouped the output lost in the aftermath of the global financial crisis in 2008 and 2009. The euro zone has yet to do so and remains 2.4% below its precrisis peak, leaving it vulnerable to outside shocks from Ukraine, Russia and elsewhere that could tip it back into recession.
The euro zone "will probably remain stuck in stop-and-go mode," said Peter Vanden Houte, an economist at ING, in a research note.
The report will likely put added pressure on the European Central Bank to do more to spur growth and boost inflation, which at 0.4% is far below the bank's target of just under 2%. The ECB has forecast 2014 GDP growth of 1%, but analysts at consultancy Capital Economics said it will probably be 0.5% to 0.7%.
In June, the ECB cut its key interest rates and introduced a new program of cheap loans to banks that are intended to be passed on to businesses.
But some economists say the central bank should go further and engage in large-scale purchases of public and private debt to reduce borrowing costs and add to the money supply.
The euro zone's three largest economies, which account for two-thirds of the region's EUR9.6 trillion ($12.8 trillion) GDP, failed to grow. German GDP shrank 0.2% from the first quarter--a bigger drop than economists had expected--and Italy's output fell at a similar pace. The French economy, the bloc's second largest behind Germany, stagnated for a second straight quarter.
The region's next largest economies, Spain and the Netherlands, posted some growth but not enough to offset weakness in their larger peers.
Some softness had been expected in Germany. Its economy grew sharply during the first quarter as an unusually warm winter boosted construction, making some payback likely. Germany's statistics office Destatis said Thursday that net trade was a drag last quarter, as import growth outpaced exports. Construction declined, but Destatis said this was due to projects being pushed forward because of the unusually mild winter. Both private and public consumption rose.
Geopolitical uncertainties likely had only a small effect on Germany last quarter, analysts said, given that the crisis in Ukraine intensified last month and the effects of sanctions imposed by the U.S. and EU on Russia--with countersanctions from Moscow--have yet to be felt. Recent German business surveys suggest these risks are starting to weigh heavily on sentiment.
"We're seeing the crisis worsen in Ukraine and Russia as well as a difficult political situation in the Middle East," Kasper Rorsted, chief executive of German consumer products company Henkel AG, said in an earnings call Tuesday. "The situation remains volatile, and we don't see it changing any time soon."
Henkel said first-half sales growth in Russia was surprisingly strong, though it expects the Russian economy to slow down significantly in the rest of the year. The impact of geopolitical tension was already being felt in Ukraine and other eastern European markets, where business slackened in the second quarter, Mr. Rorsted said.
In France, poor second-quarter growth has upended the government's plans to bring down its budget deficit, only a month after Paris adopted a revised budget to try and stay on track.
President François 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 Sapin wrote 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," he wrote in the editorial.
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 strong growth in the second quarter after a disappointing, weather-induced contraction during 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.
Todd Buell and Chase Gummer contributed to this article.
Write to William Horobin at William.Horobin@wsj.com and Todd Buell at email@example.com
(END) Dow Jones Newswires
August 14, 2014 07:09 ET (11:09 GMT)
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