The eurozone’s economic recovery has shuddered to a halt, bolstering calls for the European Central Bank to take aggressive action to boost growth and halt a slide towards deflation.
Gross domestic product was flat between April and June, compared with growth of 0.2pc in the first quarter, say figures released last week , while inflation fell to a four-and-a-half-year low of 0.4pc in July.
Dismal performances from Germany, France and Italy — the core of the single-currency region — were responsible for the stagnation, while parts of the periphery beat expectations.
German 10-year Bund yields dipped below 1pc for the first time on speculation the ECB would follow the lead of the US Federal Reserve and the Bank of England by introducing a programme of large-scale bond purchases to boost the region’s economy. Borrowing costs across the eurozone tumbled as well, with 10-year yields in Spain, Italy, Belgium and Ireland all falling to record lows.
Dismal performances from Germany, France and Italy were responsible for the stagnation
“It’s time the ECB took control and we got the real deal, instead of the weaker measures unveiled in June,” said Richard Barwell, European economist at Royal Bank of Scotland.
Germany joins just a handful of countries whose 10-year bonds have fallen below 1pc, including Japan, which has struggled to exit more than a decade of deflation.
Eurozone inflation of 0.4pc last month was less than a quarter of the ECB’s target of below but close to 2pc.
“The ghost of Japan is hovering over markets and will be for the coming months,” said Simon Fasdal, head of fixed income trading at Saxo Bank.
While the US and UK have surpassed their pre-crisis peaks, the currency bloc’s economy is still smaller than before the collapse of Lehman Brothers almost six years ago.
Escalating geopolitical tensions with Russia damaged confidence in Germany, contributing to a 0.2pc fall in economic output — the first contraction since 2012. The German economy accounts for almost 30pc of eurozone GDP.
France’s economy stagnated, while Italy is in its third recession since 2008, meaning none of the eurozone’s three biggest economies registered any growth in the second quarter.
The Netherlands’ economy grew 0.5pc after contracting between January and March, while Portugal and Spain both grew 0.6pc.
The gloom threatens to intensify the debate in Brussels over the need for reforms after France said it would miss its deficit target of 3.8pc of economic output, an important stepping stone to meeting the EU-mandated level of 3pc.
Published in Dawn, Economic & Business, August 18th, 2014
