The euro-zone economy stalled in the second quarter, raising the ugly prospect that the region's meager recovery has lost momentum just as it faces fresh headwinds from Russia and Ukraine.
Germany's economy, long Europe's growth engine, 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 Centre 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.
The downturns in Europe and Asia come as the U.S. flashes signs of increasing economic vigor after a brief chill earlier this year. The U.S. economy grew in the second quarter by an annual rate of 4%, thanks to stronger consumer spending and corporate investment. Despite tepid wage gains, U.S. firms have been on the strongest sustained hiring stretch since 2006, adding more than 200,000 jobs each month since February.
But the growing sense of optimism in the U.S. contrasts with deepening uncertainty in many other parts of the world.
Mexico's central bank lowered its growth forecast for 2014 to 2.4% from 2.8% on Wednesday. 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.
It is possible such sluggishness is temporary—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 the central bank's injections of cash into China's financial system, 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 to escape 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, was largely flat 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. Nerves over Europe's outlook helped cause the yield on Germany's 10-year bond, considered a haven, to dip below 1% for the first time.
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 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 HEN.XE -0.69% Henkel AG & Co. KGaA Germany: Xetra €79.35 -0.55 -0.69% Dec. 4, 2014 10:54 am Volume (Delayed 15m) : 3,405 P/E Ratio 20.88 Market Cap €36.40 Billion Dividend Yield 1.51% Rev. per Employee €344,803 More quote details and news » HEN.XE in Your Value Your Change Short position 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. The country's unemployment is at all-time highs. A shrinking construction sector is making things worse, forcing entrepreneurs like Patrick Liébus to resort to innovative strategies to keep people on the job.
Market Talk
Prolonged Euro-Zone Downturn, Says Mizuho
The weak GDP figures for Germany may to an extent be attributed to some production being shifted to earlier months, but even so, the data is very disappointing, says Mizuho International's chief European economist Riccardo Barbieri. "For the euro zone as a whole, surveys are now, on balance, worsening and so we cannot rule out that these numbers mark the beginning of a more prolonged downturn rather than a dip," he says. (josie.cox@wsj.com)
Worrying Signs in French GDP, Says Barclays
A breakdown of France's GDP shows no reassuring signs, says Barclays economist Fabrice Cabau. The rebound in consumer spending only corrects the fall in the first quarter and investment has fallen once again, Mr. Cabau notes. "All in all, we find that today's investment and underlying private consumption disappointments are a key worrying sign for the French economy outlook," says Mr. Cabau.
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 and strengthen 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.
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.
"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.
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 overhauls aimed at making economies more competitive are the answer to Europe's problems.
