Eurozone Econmic Growth Slowed in Second Quarter, Data Slow

By Nina Adam and Brian Blackstone 

        FRANKFURT--The eurozone's modest economic recovery suffered a setback last quarter as France stagnated and Germany posted a tepid expansion, underscoring deep-rooted fragility in the region that could threaten the global recovery.
        The figures, released Friday, came amid heightened concerns in financial markets about China's economy, which has been an engine of growth for global activity over the past decade. They put greater pressure on the U.S. to generate output for both itself and its trading partners, and suggest the European Central Bank will keep its aggressive stimulus measures in place at least through next autumn as planned.
        Gross domestic product growth in the eurozone slowed to 0.3% from 0.4% in the first quarter, the European Union's statistical agency said Friday, falling short of economists' forecasts of a 0.4% gain. GDP grew 1.3% on an annualized basis, Eurostat said.
        Germany's quarterly growth rate quickened to 0.4% in the second quarter from 0.3% in the first, falling short of economists' forecasts of 0.5% growth. Output in France stagnated after a strong jump in the first three months of the year. The Italian, Dutch and Austrian economies grew, but just barely. Finland contracted for a fourth straight quarter.
        "In Europe we have regained a certain level of stability since the height of the crisis, but we see no sign of acceleration," said Andrea Tomat, chief executive of sportswear maker Lotto Sport Italia SpA, based near Treviso, northern Italy. In many eurozone countries, he said, "unemployment is still very high and consumers are still spending with a lot of caution."
        Lotto expects its sales revenue to grow by about 5% to 8% in 2015 from last year, Mr. Tomat said. But that is mainly thanks to the company gaining market share in Italy, and developing some new export markets -- including in sub-Saharan Africa -- rather than because core European markets are growing.
        A particular concern is that eurozone output weakened at a time when the region benefited from massive stimulus on three fronts: a weaker euro exchange rate that typically boosts exports, lower oil prices that raise disposable incomes, and a bond-buying program of more than EUR1 trillion ($1.12 trillion) launched by the ECB in March.
        "The fact that eurozone countries aren't benefiting from this stimulus cocktail doesn't bode well for the rest of the year," said Carsten Brzeski, an economist at ING Bank.
        The numbers drew little reaction from markets. European stocks were little changed Friday morning and the euro was slightly lower against the U.S. dollar at $1.1150.
        The growth rate in the eurozone--the world's second-largest economic region, after the U. S.--remained insufficient to boost inflation. Consumer price inflation grew just 0.2% in July on an annual basis, Eurostat said Friday, far below the ECB's target of just under 2%.
        Still, there were some bright spots. Spain's GDP expanded 1% on a quarterly basis, the fastest among the large eurozone economies, suggesting it is recovering from a severe housing collapse that crippled its economy in the wake of the global financial crisis. Greek GDP rose unexpectedly too, although many economists expect the flaring of the country's debt crisis in recent months and introduction of capital controls in late June to hamper output during the rest of the year.
        Rasmus Gudum-Sessingo, an economist at Handelsbanken, warned that the peripheral economies won't be able to maintain the present pace of growth and might even "contribute to negative risks, not least through increased political uncertainty," with elections taking place in Portugal and Spain later this year.
        Friday's report marked a grim distinction for the eurozone: The currency area still hasn't recouped output lost in the aftermath of the global financial crisis in 2008. In contrast, the U.S. and U.K. have seen firmer, jobs-rich expansions. Eurozone unemployment was 11.1% in June, more than double the rate in the U.S. and far higher than in the U.K. as well.
        "The recovery in the euro area was expected to remain moderate and gradual, which was considered disappointing from both a longer-term and an international perspective, as real GDP currently stood only close to its 2008 level in the euro area, while in the U.S. it had registered a significant rebound," the ECB said in the minutes of its July 15-16 meeting, released Thursday.
        Germany's GDP report didn't include a component breakdown, but statistics agency Destatis said net exports were the main driver of activity in the second quarter, as foreign trade got a boost from a weaker euro exchange rate, which makes eurozone goods more competitive elsewhere. But economic growth was held back by weak investments, particularly in construction, it said.
        French Finance Minister Michel Sapin, commenting on the weak French data, said the country's economy can still grow enough by the end of the year to start bringing down unemployment and reach the official 1% 2015 GDP target, as the government previously forecast.
        To achieve that, Mr. Sapin said the government will stick to its policy of tax cuts for businesses, which has proved controversial with the left of the ruling Socialist party. "We must stay the course," Mr. Sapin said.
        "Business is going well at the moment--for us, as well as for our clients and suppliers," said Rainer Hundsdoerfer, chairman of ebm-papst group, a Germany-based company that makes electric motors and fans. "But economic growth is very much driven by exports. If China were to slow down sharply, then this would undoubtedly hit export trade in Europe, especially in Germany," he added.
        Meanwhile, France's construction sector is suffering from a combination of government spending cuts, businesses cautious about investing and household nervousness due to high unemployment. French construction federation the FFB says there were 51,500 fewer jobs in building in the first quarter of this year than the same period a year earlier.
        Construction and concession company Vinci SA is also feeling the pinch, having reported a 9.1% drop in first-half revenues in France. As the company presented its first-half results at the end of July, it said it aims to shift more of its sales out of France.
        William Horobin in Paris and Marcus Walker in Athens contributed to this article.
        Write to Nina Adam at nina.adam@wsj.com and William Horobin at William.Horobin@wsj.com
        (END) Dow Jones Newswires

        August 14, 2015 10:30 ET (14:30 GMT)