Europe edges closer to recession as economy shrinks 0.2 per cent

After treading water for months, the euro zone economy is showing its first official signs of sinking.

The economies of both the 17 countries that use the euro currency and the wider 27-country European Union contracted by 0.2 per cent in April to June period, Eurostat said Tuesday.

That’s after a flat result for both regions in the first quarter. It’s also down 0.4 per cent from the year-earlier period.

The decline was widely expected, but that doesn’t make it less troubling.

Economists worry that the drop in economic output, or GDP, is a sign that the region is heading for a recession. That’s bound to heap more pressure on political leaders who are already struggling with massive debt, unprecedented austerity measures, and record unemployment – not to mention the task of keeping the troubled currency intact.

The decline is also evidence of a vicious cycle. Indebted governments slashed spending on jobs and social programs to save money. That contributed to slowing in the region’s economy. Now, that slower growth means less tax revenue because people have less money to spend and businesses are earning less profit. That makes it all the more unlikely that government will be able to balance their books.

“The big picture is that the economic growth required to bring the region’s debt crisis to an end is still nowhere in sight,” said Jonathan Loynes, chief European economist at Capital Economics.

Germany is still the region’s bright spot. Its economy grew by a better-than-expected 0.3 per cent from April to June, down from 0.5 per cent in the first quarter.

France held steady with zero growth for the third straight quarter, bucking expectations that it would sink into negative territory.

Elsewhere, the picture is bleak: Italy’s economy contracted in the second quarter. Spain, Portugal, Greece, and Cyprus are in recession.

“Overall these figures don’t really change much for Europe,” economist Benjamin Reitzes of BMO Capital Markets said. “The debt crisis and resulting tough austerity and reform are keeping [southern Europe] in recession, while Northern Europe skirts by with modest growth. The ECB’s perspective is unlikely to change much with these figures, as more easing is needed, but not necessarily forthcoming.”

Germany’s modest growth was overshadowed by data suggesting that decline is setting in. The country’s statistical office said that while growth in the quarter was driven by exports and consumer spending, business investment fell.

As well, industrial production in the euro zone, for instance, fell by 0.6 per cent in June. In France, consumer prices dropped by 0.5 per cent in July.

Europe’s stumbling economy is making it harder for other economies around the world to recover.

Policymakers all round the world are urging more decisive action, particularly from the European Central Bank, to deal with the crippling debt crisis to restore confidence to the global economy.

“The ECB’s recent announcement that it will do ‘whatever it takes’ to save the euro is welcome, but clarity over what will be done is crucial,” said Tom Rogers, a senior economic adviser for accounting firm Ernst & Young.

Original Article
Source: the star
Author: Madhavi Acharya-Tom Yew