An employee works on a BMW C600 Sport maxi-scooter on the assembly line at the BMW factory in Berlin.
German gross domestic product shrank 0.2 percent, more than economists forecast, while French data also released today showing the economy stagnated prompted the government to scrap its 2014 deficit target. Combined with Italy’s unexpected slide into recession, the reports may add pressure on the European Central Bank to expand stimulus.
While Germany’s second-quarter weakness was largely due to a warm winter that shifted production to earlier months, the outlook is now clouded by the impact of
international measures against Russia over its support of separatists in Ukraine. The euro-area recovery is already fragile, with inflation running at the slowest pace since 2009, and current ECB measures will take time to have an effect.
“Given that the economy still has a lot of slack and inflation is already at low levels, signs of a stalling recovery strengthen the case for more monetary stimulus,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “The question on the whole Ukraine crisis is how big the exact effect will be -- and the big intangible is confidence.”
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Euro GDP
German and French bonds rose after the data with 10-year yields of both nations’ debt falling to record lows, extending a rally fueled by bets on more central-bank stimulus. The euro was little changed at $1.3357 at 10:08 a.m. Frankfurt time.Euro-area GDP growth probably slowed to 0.1 percent in the second quarter from 0.2 percent in the first three months of the year, according to a separate Bloomberg survey. That report is due from the European Union’s statistics office in Luxembourg at 11 a.m. today.
Some smaller countries fared better. The economy of the Netherlands rebounded last quarter, expanding 0.5 percent, and Austria’s economic growth accelerated to 0.2 percent, data showed today.
French GDP was forecast to rise 0.1 percent, according to the median estimate in a Bloomberg survey. The economy has now stagnated for two straight quarters and Finance Minister Michel Sapin said he expects full-year growth of 0.5 percent instead of 1 percent announced previously. This year’s deficit will exceed the limit of 4 percent of economic output agreed with the European Commission, he said.
Weather Effect
Germany’s economy shrank by more than the 0.1 percent estimate in a separate Bloomberg survey. Construction investment “clearly” declined last quarter after the extremely mild winter boosted output in the previous three months, the statistics office said. Net trade subtracted from GDP as imports outpaced exports, while private and public consumption rose.The Frankfurt-based Bundesbank predicted in June that the economy will expand 1.9 percent this year and 2 percent in 2015. Bundesbank President Jens Weidmann told Phoenix TV this week that he’s sticking “more or less” to those forecasts, while saying the Ukraine crisis could weigh on the outlook.
The EU agreed last month to curb Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet. Russia, which counts Germany as its biggest European trading partner, retaliated with sanctions on EU food products.
Eastern Europe
Dusseldorf-based Rheinmetall AG reduced its 2014 profit forecast after the German government blocked a contract to build a military training center east of Moscow. Fraport AG, the operator of Frankfurt’s airport, cut its retail outlook after the number of Russians departing Europe’s third-busiest hub fell 3.8 percent in the first half.A gauge of investor confidence in Germany fell this month to the lowest level since 2012. Factory orders slumped in June by the most in more than 2 1/2 years, with the Economy Ministry citing political tension as one reason.
The Ukraine crisis and related sanctions are also weighing on the economies of eastern Europe. The Czech Republic unexpectedly stagnated last quarter and Romania’s economy shrank 1 percent, data showed today. Polish growth slowed to 0.6 percent from 1.1 percent, and Hungarian growth cooled to 0.8 percent from 1.1 percent while still beating estimates.
Structural Reform
The euro area is struggling to recover from its longest-ever recession, which ended last year. Inflation in the currency bloc was 0.4 percent in July, and has been stuck at less than half the European Central Bank’s goal of just below 2 percent since October. The central bank’s Survey of Professional Forecasters today showed analysts downgrading their price outlook for 2014 and 2015.The ECB announced an unprecedented package of stimulus measures in June, including a negative deposit rate and targeted loans for banks. President Mario Draghi warned last week that “heightened” political risks could affect the region’s “weak” recovery.
At the same time, he called for countries to implement structural reforms, saying those that have done so are recovering faster. Spain’s economy expanded last quarter at its quickest pace since 2007, beating Germany for the first time in five years. Greece’s economy contracted at its slowest pace in almost six years.
“It’s more a return to reality for the euro area, a wake-up call, that you have to do more, especially in France and in Italy,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. “Otherwise maybe already next year, if stagnation continues and growth doesn’t materialize, you could have a return to the crisis no matter what the ECB does. This is not our baseline scenario, but medium-term risks have increased.”
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