Modest Euro Zone Economic Growth Masks Diverging Performance Across the Bloc, According to Reuters

By Ross Finley

LONDON (Reuters) – Economic growth in the euro zone slowed significantly in the second quarter, halving to a modest rate. This deceleration was primarily influenced by a mild slowdown in Germany and an unexpected stagnation in Italy, casting doubt on the likelihood of a quick recovery for the region.

The quarterly expansion of 0.3 percent, equating to a 1.6 percent annual growth rate, aligned with economists’ predictions noted in a recent Reuters poll. This data suggests that the euro zone was already experiencing a slowdown prior to the UK’s shocking decision on June 23 to exit the European Union.

Although survey data has not shown clear signs of economic disruption outside of the UK since the referendum, official statistics indicated that an initial surge in activity at the beginning of the year was temporary, implying that additional stimulus measures may be necessary.

Bert Colijn, a senior economist at ING, questioned whether even this reduced growth rate could be maintained in the third quarter. He pointed out that with Brexit uncertainty affecting exports and industrial performance, the burden of driving economic expansion may largely fall on consumers.

Furthermore, a Reuters poll indicated limited prospects for any broad economic improvement in the near term. Policymakers at the European Central Bank and in other member countries face the challenge of varying growth rates across the euro zone. Many are hesitant or unable to implement fiscal measures aimed at boosting the economy.

In Germany, the largest economy in the euro zone, GDP growth reached 0.4 percent, surpassing expectations of 0.2 percent and yielding a strong annual growth rate of 3.1 percent—the highest in five years. This growth, although slower than at the beginning of 2016, was driven by a combination of rising exports and consumer spending.

While the overall euro zone performance suggests the need for ongoing stimulus from the European Central Bank, which has implemented measures such as reducing its deposit rate to -0.4 percent and purchasing substantial amounts of government securities, these actions may not be as critical for Germany.

KfW bank economist Joerg Zeuner expressed concern about the eventual impact of Britain’s decision to leave the EU. He noted that the UK is a significant market for German industries, particularly automotive and chemicals, and that any economic slowdown in the UK would likely extend to Germany through reduced exports.

Italy, the euro zone’s third-largest economy, reported no growth at all in the second quarter, hindered by declines in industrial activity and domestic demand. This disappointing outcome follows Italy’s emergence from its worst recession since World War II and presents a challenge for Prime Minister Matteo Renzi, who has bet on revitalizing the economy. Economists from Citi warned that fading exports, rising political uncertainty, and issues within the banking sector could further restrict growth opportunities in the latter half of the year.

Preliminary data for France, the second-largest euro zone economy, similarly indicated stagnation. In the face of these challenges, and with limited indications that governments plan to ease fiscal restrictions, the responsibility continues to rest on the European Central Bank to provide necessary support for economic recovery and to boost inflation toward its target.

Contrastingly, the Netherlands showcased a more favorable economic outlook, posting 0.6 percent growth in the second quarter, spurred by strong services, robust domestic demand—particularly in housing—and solid export performance. Early reports for Spain also indicated growth at 0.7 percent.

Greece experienced a minor economic upturn, growing by 0.3 percent due to a rebound in tourism, a recovery from a contraction earlier in the year.

Meanwhile, outside the euro zone, Poland—the largest economy in Eastern Europe—saw a slight increase in growth to 3.1 percent on an annual basis, matching Germany’s expansion rate.