Eurozone growth sags to 0.2 percent in Q2

[August 16, 2011]  FRANKFURT, Germany (AP) -- Economic growth in the 17 countries that use the euro sagged to 0.2 percent in the second quarter as a previously robust expansion in Germany almost ground to a halt.

The European slowdown is more downbeat news for the global economy, following disappointing second-quarter growth in the United States, and could make the continent's government debt crisis harder to deal with.

The eurozone's growth rate, measured quarter on quarter, was well short of the 0.8 percent recorded in the first quarter.

The German economy, which is Europe's largest and makes up 27 percent of eurozone output, expanded only 0.1 percent in the quarter, as against 1.3 percent in the first three months of the year.

Germany's economy has helped support the eurozone through the government debt crisis. Large industrial firms such as Daimler AG and Siemens AG as well as many smaller companies have tapped export markets all around the world, particularly in faster-growing emerging countries.

However, its growth in the second-quarter was hit by faltering construction investment and a sharp drop in energy production after the government shut down eight nuclear because after the Fukushima reactor disaster in Japan.

Top German corporate executives have cautioned that growth could be less impressive in the second half of the year due to volatile raw material prices and the turmoil wrought by heavy levels of government debt in Europe and the U.S.

Fears about excessive levels of government debt in the United States and Europe and a possible global slowdown have been weighing on markets. The U.S. figure of 0.3 percent quarter-on-quarter -- 1.3 percent on an annualized basis -- was a disappointment, and was followed by the additional shock of a downgrade to the U.S.'s credit rating.

Overall, the figures raise concerns that the eurozone economy -- the world's second largest after the United States -- is headed for more of a slowdown than expected.

"The weak data for Germany follow recent numbers showing zero growth in France in the second quarter, and raises concerns that the euro area's hitherto strong core countries are undergoing a much deeper than previously thought soft patch," said Chris Williamson, chief economist at financial information company Markit.

Weak growth in the eurozone core of Germany and France, the main backers of the eurozone's euro440 billion bailout fund, could complicate efforts to deal with the debt crisis, said economist Christopher Weil at Commerzbank. "This could intensify the sovereign debt crisis in as far as the readiness and ability of countries with high credit ratings to help crisis-stricken countries will drop as a result," Weil said.

Europe faces a further test starting in late August, when Italy will need to return to bond markets to continue refinancing its debt load of 120 percent of annual gross domestic product. If investors won't lend at affordable rates, the eurozone will face more turmoil, economists say.

Currently the European Central Bank is buying Italian and Spanish bonds to drive yields down to affordable levels. The weak growth figures give the bank even more reason to put off interest rate increases that were once expected later this year but which many economists now think will be scrapped.

It's not just Europe that has slowed down. The U.S. economy is growing at a far slower rate than previously thought while figures Monday showed Japan contracted further in the second quarter in the wake of March's devastating earthquake and tsunami.

Eurozone leaders are trying to contain a debt crisis in which rising interest rates threaten to make it impossible for countries to roll over their debt loads. Greece, Ireland and Portugal have all needed bailouts and market turmoil has threatened Italy and Spain as well, darkening market and business confidence about coming months.

The economy for the broader, 27-member European Union also grew 0.2 percent from the previous quarter. Both the eurozone and the European Union were up 1.7 percent compared to the same quarter a year ago.

[Associated Press; By DAVID McHUGH]

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