By Brian Blackstone And Marcus Walker
FRANKFURT--The euro-zone economy stalled in the second quarter, raising the ugly prospect that the region's recent weak recovery after its long debt crisis has already lost momentum as it faces fresh headwinds from Russia and Ukraine.
Germany's economy shrank for the first time in more than a year, a development economists largely attributed to a mild winter that boosted activity in the first quarter at the expense of the second. The bigger concerns, they say, are France and Italy, where respectable rates of growth aren't even in sight.
"The euro-zone recovery never really got going, and now it appears to be petering out," said Simon Tilford, deputy director of the Center for European Reform, a nonpartisan London think tank.
The gloomy numbers out of the euro zone--whose roughly $13 trillion economy accounts for 17% of the world's gross domestic product--join a litany of similarly sour reports this week from Asia, all pointing to signs of sudden weakness among many major economies.
Japan reported a sharp contraction in the second quarter as output fell 6.8% in the wake of an April increase in the country's sales tax. Japan's slow recovery despite heavy stimulus is in part the result of surprisingly weak exports--a condition that stems from soft demand elsewhere in the world and shows how weakness can spread among economies.
In China, the central bank reported Wednesday that the broadest measure of new lending had plunged by two-thirds in July from the previous month, setting off alarm bells that the world's second largest national economy might be heading for a hard landing.
Some analysts argued such concerns were overblown--July is often a down month for credit and June's credit growth had been exceptionally strong. Even so, the figures suggested that several months of "mini-stimulus" spending on infrastructure, transportation and information technology, as well as eased liquidity by the central bank, hasn't done much to lift the economy.
In the 18-member euro zone, GDP was flat in the second quarter compared with the first, the European Union's statistics office said Thursday. That translates into 0.2% growth in annualized terms.
Over the past year, the euro zone's economy expanded just 0.7%--too slow to reinvigorate investment and job creation or toescape the legacy of heavy public and private debts in many countries.
German GDP shrank an annualized 0.6% from the first quarter and Italy's output fell, too. The French economy, the bloc's second largest behind Germany, stagnated for a second straight quarter. Spain and the Netherlands posted some growth, but not enough to offset weakness in the economies of their larger peers.
Germany's weak second quarter is widely seen as a hiccup: the country is enjoying record-high employment, rising wages and ultralow borrowing costs. A return to growth is expected in the current quarter. Germany's Bundesbank, which has considerable influence over the country's public opinion, made the unusual move of responding to Thursday's data with a statement from its economists saying the trend "remains pointed upward."
However, the continued sluggishness of business investment, despite the country's cash-rich corporations, is a puzzle that bodes ill for Germany's ability to lift euro-zone growth. Averaging out the last two quarters, which evens out weather-related swings in construction, Germany still only grew at a pace of about 1% in the first half. And that was before the crisis in Ukraine intensified last month, leading to growth-draining sanctions imposed by the U.S. and EU against Russia.
"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."
France's problems are rooted more deeply, in tight fiscal policies and long-unreformed markets. While German unemployment is near record lows, France's is at all-time highs. A shrinking construction sector is making things worse, forcing entrepreneurs like Patrick Liébus to resortto innovative strategies to keep people on the job.
Mr. Liébus has sent employees at his roofing firm in southeastern France on a three-week vacation instead of two this August as he doesn't have enough work for them. "After that there's no vacation left--it's temporary layoffs or redundancy," he said.
Some of France's largest companies are also feeling the pinch. Construction and concession giant Vinci SA said earlier this month it would record a slight decrease in revenue this year as it warned the upturn in France's building market "has not yet materialized."
European policy makers have hoped that the recovery would gather steam of its own, so that they don't have to experiment with controversial stimulus measures, including money-printing by the European Central Bank or large-scale government investment spending.
Many economists, as well as European governments, forecast recovery will resume in the third quarter andstrengthen by 2015. Business surveys such as the purchasing managers index imply faster GDP growth than recorded so far--an anomaly that optimists say will be corrected this fall.
"Our view is that temporary factors dampened growth in the first half of 2014, and this will reverse itself in the third quarter," said Marco Valli, chief euro-zone economist at Italian bank UniCredit.
Mr. Valli said two risks threaten the outlook, however: Geopolitical and trade frictions between the EU and Russia could hurt euro-zone business sentiment; and the slowdown in global trade and emerging-market growth could hit European exports.
But deeper worries loom, too. With each additional quarter of near-zero growth, the bloc's vulnerabilities--weak productivity, a stagnating labor force and fragile banking system--become more firmly entrenched. That could make the bloc resistant to stimulus from fiscal or monetary policies, a problem that has gripped Japan for years.
Japan is the first modern economy to slip into persistent consumer price declines known as deflation--a condition some European countries now seem perilously close to entering. Japan's 18-month-old stimulus experiment is the first test of a country attempting to wrench itself out of a deflationary slump.
"We should not wait until we all become Japan, we should act now," said Paul De Grauwe, professor at London School of Economics. He recommends a two-pronged approach with massive stimulus spending by governments--particularly in Germany, France and other countries that can borrow cheaply--buttressed by ECB purchases of public and private debt to increase the money supply.
But the ECB has shown little appetite for such measures beyond the cheap bank loans and record-low interest rates it has already enacted. It argues that reforms aimed at making economies more competitive are the answer to Europe's problems.
Last week, ECB President Mario Draghi berated governments for their lack of progress on structural reforms. "There are stories of young people who tried to open their business, and it takes eight to nine months before they can do so. That has nothing to do with monetary policy," he said.
William Horobin, Chase Gummer, Jacob Schlesinger and Bob Davis contributed to this article.
Write to Brian Blackstone at firstname.lastname@example.org and Marcus Walker at email@example.com
(END) Dow Jones Newswires
August 14, 2014 16:24 ET (20:24 GMT)
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