December 23, 2024

Debt Crisis Threatens to Taint Broader Economy

Most of Europe’s main stock indexes lost ground after the data suggested that the debt and economic problems in countries like Greece and Italy were infecting the rest of the 17-country euro zone. The debt crisis has led a number of governments to sharply cut spending while weathering market turmoil that has damaged business and consumer confidence.

Gross domestic product in the euro zone rose a mere 0.2 percent in the second quarter of 2011 from the first quarter, when growth had advanced by a healthy 0.8 percent, according to Eurostat, the European Union statistics agency. Quarterly economic growth across the 17-nation euro zone was the slowest since mid-2009.

G.D.P. growth in Germany, which has been the tractor hauling the rest of Europe, barely budged, rising only 0.1 percent from the first quarter, when the economy had expanded a robust 1.3 percent, the German Federal Statistical Office said. Quarter-on-quarter growth in the three months through June was well below forecasts of 0.5 percent.

The German figures come after data released on Friday showed that the French economy was at a standstill in the second quarter, leaving Europe’s two largest economies barely growing.

Because government revenue is directly tied to economic growth, the two pillars of the European economy may be less able — and less willing — to prop up the weaker members of the European monetary union. President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany met on Tuesday in Paris to discuss how to deal with the debt crisis.

“It’s the biggest potential risk,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt. “I don’t worry so much about a moderation of growth two years after a recession. What is different this time is the potential escalation of the sovereign debt crisis.”

Economists said the data could simply reflect a pause after two years of brisk expansion. But the numbers could also signal that the sovereign debt crisis is undercutting growth outside the countries like Spain that are most directly affected.

“The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy,” Lloyd Barton, an economist who advised the consulting firm Ernst Young, said in a note Tuesday.

If there was any silver lining in the report, it was the hope that slower growth would lead to less inflation, giving the European Central Bank more leeway to keep interest rates low and intervene in bond markets. Since last week, the bank has been buying Italian and Spanish debt on the open market to hold down yields so that the two countries do not face ruinous borrowing costs.

“Today’s G.D.P. release points to slightly lower second-quarter growth than the E.C.B. was expecting and lends support to the dovish voices on the E.C.B. governing council,” Jens Sondergaard, an analyst at Nomura, said in a note. He was referring to members of the council who are less concerned about inflation than hard-line “hawks.”

What impetus remains in the European economy came from countries like Austria and Finland. Even Italy, with growth of 0.3 percent compared with the first quarter, outperformed Germany in the second quarter. A whiff of hope came from Portugal, one of the countries at the heart of the debt crisis, as the economy stopped shrinking for the first time since October 2010.

European stocks initially fell sharply on Tuesday, but recovered late in the day. The benchmark indexes in Germany and France all closed down less than 1 percent.

The euro fell to $1.4404, from $1.4444.

The German economic rebound since the recession of 2009, driven by exports of cars, machinery and other goods to China and other emerging markets, has helped counterbalance weak economies in southern Europe. But if Germany slows for an extended period, the challenges posed by the European sovereign debt crisis will become that much more daunting.

Despite signs that austerity programs were hurting growth, debt-ridden governments probably have little choice but to continue to cut spending to persuade their creditors that they can meet their debt obligations. Equally important, the European Central Bank has made it clear that it would support Italy and Spain by buying their bonds only if they continued to cut reduce their deficits.

The slowdown in Germany was caused by lower household consumption and construction investment, the German statistics office said. In addition, imports rose faster than exports and led to a buildup of inventories.

Mr. Krämer of Commerzbank said that a warm spring meant that construction projects in Germany had begun earlier than usual, subtracting some activity from the second quarter.

Germany had been enjoying a period of unusually high growth, during which the number of people employed rose 1.4 percent, to 41 million people from a year earlier, the German statistics office said Tuesday. Even with the slowdown in the second quarter, the economy still grew 2.7 percent from a year earlier.

The Federal Statistical Office revised its figures for previous quarters, which meant that, contrary to earlier data, German output remained below its peak in late 2008, just before the severe global recession struck.

The slowdown was foreshadowed by earnings from companies like Siemens and Deutsche Bank that fell short of analysts’ expectations, reinforcing the feeling that the pace of German economic growth was flattening. Surveys of business sentiment have also pointed to slower growth, though they are not yet signaling a recession.

Greece is already in recession, while growth in Spain slowed to 0.2 percent from 0.3 percent in the previous quarter.

Trade data from Eurostat contributed to the gloomy picture. Seasonally adjusted figures showed that both exports and imports in the euro area slowed in June, while the trade deficit widened to 1.6 billion euros ($2.3 billion), from 800 million euros in May.

Article source: http://feeds.nytimes.com/click.phdo?i=cb53a362973fb26bc5c807d03ce1acad

Speak Your Mind