Euro area exits record-long recession led by Germany, France
The euro area’s economy emerged from a record-long recession in the second quarter, led by Germany and France, amid the first sustained period of financial-market calm since the start of the debt crisis.
Gross domestic product in the 17-nation euro area expanded 0.3 percent in the April-June period after a 0.3 percent contraction in the previous three months, the European Union’s statistics office in Luxembourg said today. That exceeded the median estimate of 0.2 percent growth in a Bloomberg News survey of 41 economists. From a year earlier, the economy shrank 0.7 percent in the second quarter.
Germany and France, the euro area’s two largest economies, both showed faster-than-projected expansions in the quarter. While the overall outlook has improved, the recession pushed the unemployment rate to a record and parts of southern Europe remain mired in a slump, with more than half of young people in Spain and Greece out of work.
“The growth rates we’re currently seeing are still far too low and we’re seeing an increasing gap between financial and political hope on the one side and economic reality on the other,” Stephen King, U.K.-based chief global economist at HSBC Holdings Plc, told Bloomberg Television on Aug. 12. “The problem is the gap between the growth that’s being delivered and the growth that’s required to make the fiscal numbers add up in the medium term.”
The euro was higher against the U.S. dollar, trading at $1.3266 at 10:41 a.m. in Brussels.
In Germany, GDP increased 0.7 percent in the second quarter, more than the 0.6 percent gain forecast by economists. The French economy expanded 0.5 percent after two quarters of contraction. Still, at least four of the euro area’s 17 member countries remain in recessions, including Italy and Spain.
The European Central Bank has cut interest rates to a record low and pledged to keep them there or lower for an “extended period” to bolster the economy. With the jobless rate at 12.1 percent, the highest since the euro’s debut in 1999, ECB President Mario Draghi this month described progress as “tentative.”
The International Monetary Fund last month cut its global growth projections, while the U.S. Treasury Department’s top international official, Lael Brainard, said Europe faces the risk of prolonged economic stagnation unless policy makers encourage domestic demand. Euro-area unemployment has held at a record since March and almost a quarter of young people across the bloc are without jobs. The ECB forecasts that the euro economy will shrink 0.6 percent this year.
While Europe’s recovery inches forward, conditions in major export markets such as the U.S. and China are improving.
In China, July industrial output rose more than economists expected after a larger-than-forecast rebound in exports eased concern that a credit squeeze in the world’s second-biggest economy would curb growth sharply. The U.S. economy grew at a 1.7 percent annualized rate from April through June after a 1.1 percent pace in the first quarter.
“Euro-area export growth should benefit from a gradual recovery in global demand, while domestic demand should be supported by the accommodative monetary-policy stance as well as recent gains in real income owing to generally lower inflation,” Draghi said on Aug. 1. The ECB cut its benchmark interest rate to a record low of 0.5 percent in May and committed in July to keep it at the present level or lower for “an extended period” to foster growth.
Global companies’ second-quarter earnings suggest the worst may be over for Europe. The continent’s second-biggest automaker, PSA Peugeot Citroen, reported a smaller operating loss for the second quarter than analysts had projected and French car sales rose in July for the first time in almost two years. Henkel AG, the German maker of Loctite glue, reported second-quarter earnings that beat estimates.
Sovereign borrowing costs have dropped across the bloc this year. Italy’s and Spain’s 10-year yield premium over benchmark German bunds shrank to the smallest in two years yesterday. The spread narrowed to 237 basis points for Italy, the least since July 22, 2011, and compared with a euro-era record of 575 basis points in November 2011. For Spain, it shrank to 265 basis points, the tightest since Aug. 16, 2011, down from 650 basis points in July 2012, when Draghi pledged to do whatever was necessary to hold the single currency together.
The yield on Spain’s 10-year debt was at 4.49 percent at 10:18 a.m. in Brussels. The yields for similar maturities were at 1.82 percent for Germany, 2.36 percent for France and 4.21 percent for Italy.
Today’s GDP report is a first estimate for the April-June period. The statistics office is scheduled to publish a breakdown of second-quarter GDP next month.
[Bloomberg]
