Eurozone recovery stalls as German, French economies sputter

Economic recovery in the 18-country eurozone appeared to stall in the second quarter, as the main growth engines, France and Germany, ground to a standstill, data showed on Thursday.

In Germany, Europe's biggest economy, activity actually contracted slightly by 0.2 percent, hit by weak exports and falling investment, according to a flash estimate by the federal statistics office Destatis.

And the region's number two economy, France, showed zero growth for the second consecutive quarter, according to the national statistics office INSEE.

In Germany, analysts had been forecasting zero growth or even a minimal contraction in the second quarter after the unusually mild winter boosted activity in the first three months of the year.

Destatis explained that, as a result of the mild weather, construction investment that would normally have been made later in the year was brought forward.

Exports were also weak, not climbing as strongly as imports, with the result that the net contribution of foreign trade to GDP growth was negative in the second quarter.

On the positive side, both private household and public sector spending increased, Destatis noted.

In France, the ongoing stagnation prompted the finance minister to slash the government's forecast for growth in 2014 to "around 0.5 percent" compared with a previous projection of 1.0 percent.

Michel Sapin said that "growth has broken down, in Europe and in France."

"With zero growth in the second quarter, thereby extending the stagnation we saw in the first, our country is slowing down and will not achieve the one percent growth observers were predicting three months ago," Sapin wrote in an opinion article in the daily Le Monde.

"This year, growth in France will be around 0.5 percent, and there is nothing that would allow us to forecast, at the moment, that growth in 2015 will be much above 1.0 percent," he added.

Analysts have warned for months that France, the second biggest economy in the eurozone, looks increasingly the weak link in a halting recovery as the government battles to push through much-needed reforms.

- Temporary blip? -

But in Germany, at least, economists were confident that the second-quarter contraction would prove short-lived.

"The second-quarter setback reflects a combination of technical factors and external weakness, but not fundamental problems in the economy," said Berenberg Bank economist Christian Schulz.

"A relatively mild winter triggered a shallower than usual spring rebound in construction activity, while the timing of Easter holidays may have also shifted some production from the second quarter to the first quarter," he said.

"Put simply, the first-quarter figure probably overstated underlying growth a bit, while the second-quarter decline understates it."

Recent confidence surveys suggest that the crisis in Ukraine has made German companies more cautious about their investment plans, but the impact of tit-for-tat economic sanctions is likely to have been limited so far, analysts said.

Schulz said that "with a very strong labour market, rising wages and low inflation, the fundamental outlook for consumers is very positive."

And the underlying domestic strength suggested that Germany should resume growth soon, the expert said.

"In the short term, the escalation of the conflict in eastern Ukraine is likely to lead to a further serious deterioration in confidence surveys and economic data. But Germany should rebound quickly once the conflict fades from the headlines and should resume its role as engine of eurozone growth," he said.

In Berlin, economic think-tank DIW said that with weak industrial orders expected in the third quarter, "it is possible that the German economy could slip into a shallow recession.

"But as long as the crisis remains under control and the eurozone economy gradually recovers, the German economy should find its way back to a moderate recovery," said DIW economist Ferdinand Fichtner.

Natixis economist Johannes Gareis said he expected "solid domestic fundamentals to pull the German economy out of the doldrums" again soon.

"Supported by low interest rates, low inflation and a robust labour market, real private consumption is expected to remain an important pillar of the German economy," he said.