German GDP Contracts as French Economy Stagnates

German GDP Contracts as French Economy Stagnates

Euro Zone's Leading Economy Shrinks 0.2% in Second Quarter

By WILLIAM HOROBIN And TODD BUELL CONNECT

Updated Aug. 14, 2014 4:27 a.m. ET / http://online.wsj.com/articles/french-gdp-fails-to-grow-in-second-quarter-1407994573

Germany's economy contracted while France's stagnated in the second quarter, indicating the euro zone's yearlong recovery may have stalled, and likely pressuring policy makers to come up with some new ideas for boosting growth.

The euro zone's largest economy contracted 0.2% in the three months to June, Germany's federal statistics office said, the first decline in output since the start of 2013. Compared with the second quarter of 2013, output was up 1.2%. Economists polled by The Wall Street Journal last week said they expected the economy to shrink 0.1% on the quarter and grow 1.4% in annual terms.

Destatis said that net trade was a drag on growth, as import growth outpaced export growth. Construction investment declined, but Destatis said this was due to projects being pushed forward because of the unusually mild winter. Both private and public consumption rose compared with the first quarter, the statistics office said.

Earlier on Thursday, figures from France's statistics agency showed the euro zone's second-largest economy failed to record any growth for the second successive quarter in the period April through June. Economists polled by the Journal had expected a 0.1% expansion in gross domestic product in the second quarter from the first. Compared with the same period of 2013, GDP was up just 0.1%.

Figures published earlier this month showed Italy's economy also contracted in the second quarter, by 0.2%. The data released Thursday mean that none of the euro zone's three largest economies—which account for two thirds of the currency area's output—expanded in the three months to June, making it unlikely that the euro zone as a whole managed to generate any growth.

The data weighed on European equity markets. Paris's CAC-40 lost 0.4% in early trade, while Frankfurt's DAX waned 0.3% and has now fallen 6.75% since the start of July.

Indexes in Southern Europe felt the heat too, with Spain's IBEX 35 losing 0.4% and Italy's MIB tumbling 0.6%.

The yield on the 10-year German government bond slipped to below 1%—its lowest level on record and well below the previous troughs hit in July 2012, when the euro-zone debt crisis threatened to spiral out of control. Yields fall as prices rise.

The weak recovery leaves the currency bloc lagging other advanced economies such as the U.S. and the U.K. The sluggishness is keeping unemployment high and inflation low, increasing pressure on the European Central Bank to lower its outlook for economic growth and take more action to bring inflation closer to its 2% target from around 0.4% currently.

Even before the second-quarter figures were released, forecasters tasked by the European Central Bank downgraded their growth forecast for this year, but kept the outlook for next year and 2016 unchanged, according to a report issued Thursday by the ECB.

In its quarterly Survey of Professional Forecasters, the ECB projected GDP growth this year will be 1.0%, below the 1.1% rate forecast in May. The outlook for 2015 and 2016 remained unchanged at 1.5% and 1.7%, respectively.

"These expectations imply a gradual strengthening of economic activity in the years ahead," wrote the ECB. Survey respondents indicated that "the downward revisions for 2014 were driven by a weaker-than-expected momentum in the second quarter, mainly reflecting lower-than-envisaged export and private consumption growth."

Elsewhere in the euro zone, Austria's economy grew at a modest 0.2% rate, an improvement on the 0.1% recorded in the first quarter, while Slovakia matched Spain in recording growth of 0.6%. The Netherlands rebounded from a first-quarter contraction to grow 0.5%.

Among those countries that are members of the European Union but haven't adopted the euro, Romania's economy contracted 1.0% during the quarter, while the Czech Republic's economy stagnated at 0.0% after an encouraging start to the year. Hungary's economy performed better than economists had expected, growing 0.8% against a consensus forecast of 0.7%.

Poland's economy slowed, growing 0.6%, but Bulgaria's picked up to grow 0.5%. Taken overall, there was little evidence of an immediately negative impact on the economies of Central and Eastern Europe from growing tension with Russia over Ukraine's future. However, the period ended before the downing of Malaysia Airlines Flight 17 in July and the tit-for-tat imposition of sanctions between the EU and Russia.

In France, poor second-quarter growth has upended the government's plans to bring down its deficit, only a month after Paris adopted a revised budget to try and stay on track.

Mr. Hollande's government had been banking on 1% growth this year to bring the deficit down to 3.8% of GDP. But in an editorial published in Le Monde on Thursday, French Finance Minister Michel Sapin wrote that the economy is now likely to grow just 0.5% this year, and by no more than 1.0% next year.

Mr. Sapin acknowledged that the government won't meet its budget deficit target.

"It is better to admit what is than to hope for what won't be," Mr. Sapin wrote in the editorial.

Weak growth combined with low inflation will drag on tax revenue and swell the size of deficits relative to the size of the economy, the minister said. France's budget deficit will be over 4% of economic output this year instead of falling to 3.8% from 4.3% last year, he added.

The euro-zone economy's disappointing performance in 2014 will likely fuel a more intense debate about the wisdom of pursuing austerity programs aimed at cutting government borrowing.

France wants to change European policy to adapt deficit reduction to the current economic situation, Mr. Sapin said.

"Europe must take firm, clear action by deeply adapting its decisions to the particular and exceptional situation of our continent," Mr. Sapin said.

The ECB is also likely to come under pressure to do more to boost growth, having as a recently as June cut its key interest rates and launched a new program of cheap loans to banks that are intended to be passed on to businesses.

Mr. Sapin said the ECB must also go to the limits of what is possible so that the euro "returns to a level that is more favorable to the competitiveness of our economies."

Although it remains the weakest part of the global economy six years after the onset of the financial crisis, the euro zone isn't alone in confronting weak and uneven growth. Japan on Wednesday reported its economy contracted at an annualized rate of 6.8% in the second quarter following a strong first quarter inspired by an impending increase in the sales tax. The U.S. returned to growth in the second quarter after a disappointing, weather-affected first three months of the year, while China has resorted to a variety of stimulus measures to shore up flagging growth, registering a pickup in its year-to-year expansion to 7.5% in the second quarter from 7.4% in the first.

—Nicole Lundeen in Vienna, Sean Carney and Leos Rousek in Prague, and Margit Feher in Budapest contributed to this article.

Write to William Horobin at William.Horobin@wsj.com and Todd Buell at todd.buell@wsj.com