Eurozone Economy Stalls, Adding New Worries for American Recovery

(Los Angeles Times/MCT) —

The Eurozone’s feeble recovery came to an outright halt in the second quarter, the latest in a batch of disappointing global economic indicators that have clouded the prospects for American growth.

Economic output in the 18-nation euro area stalled in the April-June period, after four quarters of tiny gains, Eurostat, the European Union’s statistical office, reported Thursday.

The 0 percent change in gross domestic product from the previous quarter followed growth of 0.2 percent in the first three months of the year. The performance was worse than analysts had predicted. Germany’s economy, the Eurozone’s largest, contracted 0.2 percent over the quarter, as did Italy’s, which slipped into its third recession in six years. France, the bloc’s third-biggest economy, showed no growth for the second straight quarter.

Although analysts do not foresee a downturn in the Eurozone economy — the July purchasing managers’ survey for the region was encouraging — rising geopolitical tensions have added to the risks.

The EU’s trade sanctions against Russia over the crisis in Ukraine, and the counter-sanctions by Russia, are likely to crimp the Euro area’s sales of farm goods. That has exacerbated fears of deflation — a debilitating condition of falling prices and wages — as an oversupply of food products in home markets could further tamp down domestic prices. The annual inflation rate in the Eurozone was just 0.4 percent in July.

The weak report on the Eurozone comes after news that Japan’s economy, the world’s third-largest, shrank by a larger-than-expected 1.7 percent in the second quarter, or 6.8 percent at an annual rate. Consumer spending took a big hit after the government’s sales-tax hike on April 1, and drops in residential investment and business investment added to the poor performance.

China’s economy, the second-largest, after the U.S., also showed signs of weakening at the start of the third quarter. The pace of retail sales, investments and industrial production all slowed in July compared to the previous month.

The weak recent data could give way to more economic stimulus in both Japan and China, analysts say. And in the Eurozone, the economic slowing could push the European Central Bank to do more to boost growth and inflation. If the ECB further eases monetary policies, that would likely lower the value of the euro relative to the dollar, which could pinch American exports to the Eurozone.

Troubles in the global economy have dogged the American economy since early in the recovery, with the Eurozone’s debt crisis, the so-called Arab Spring in the Middle East and the Japanese tsunami hurting momentum in varying degrees. In a speech this week, Stanley Fischer, the Federal Reserve’s vice chairman, noted that these headwinds have hurt exports and corporate earnings; depressed stock prices at times; and weighed on business and household financial decisions.

U.S. economic growth stalled early this year, largely because of the harsh winter, but rebounded sharply in the second quarter. Economists are hoping that the recovery, now in its sixth year, will maintain a higher rate of growth of about 3 percent in the coming quarters, but economists say there are two big obstacles: the soft U.S. housing market and fresh warning signs in the global economy.

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