Europe’s engine stuttering: Spain bests Germany
Frankfurt — Germany probably underperformed Spain last quarter for the first time in more than five years as the euro-area recovery almost ground to a halt.
After leading the currency bloc out of its longest-ever recession last year, Europe’s largest economy shrank in the three months through June, according to a Bloomberg News survey before data this week. The downturn in the region’s powerhouse highlights the fragility of a revival that European Central Bank President Mario Draghi has described as modest and uneven.
The 18-nation euro area is struggling to boost growth and inflation even amid unprecedented ECB stimulus, with Draghi citing inadequate structural reforms as a key reason. While the German data is distorted by mild winter weather that front- loaded output earlier in the year, Bundesbank President Jens Weidmann has warned the country must also adjust or risk losing its role as a growth engine.
This week’s reports "will probably underline that the problems in the euro zone have moved north," said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. "The weak recovery will definitely provide the doves in the ECB Governing Council with a weighty argument to demand further expansionary measures."
German GDP shrank 0.1 percent in the three months through June, the first contraction since 2012, according to the median estimate in the Bloomberg survey. The economies of the euro area and France grew 0.1 percent, separate surveys show. The reports will be published on Aug. 14 along with those for the Netherlands, Austria and Portugal.
Spain posted an expansion of 0.6 percent in the same period, the National Statistics Institute said last month. Italian GDP fell 0.2 percent, after a 0.1 percent decline in the previous quarter, taking the country into its third recession since 2008. Draghi took aim at Italy last week for lack of progress in reforms.
"It’s pretty clear that the countries that have undertaken a convincing program of structural reforms are performing better, much better, than the countries that have not done so," he said on Aug. 7 in Frankfurt after the ECB left interest rates unchanged at record lows.
Italian Prime Minister Matteo Renzi responded that he agreed with Draghi that his country must become more competitive. He took a step in that direction last week when the Senate approved a bill that aims to strip the chamber of powers and streamline political decision-making. He also told the Financial Times that his model "is not Spain, but Germany."
Spain is seeing domestic demand start to recover from the deepest austerity measures in the country’s democratic history, and Prime Minister Mariano Rajoy is relying on that rebound to dent a 25 percent unemployment rate that is the second-highest in the European Union. German carmaker Opel said last month that its market share in Spain was the strongest since 2006 in the first half.
Spain’s Ibex 35 index of stocks has gained 2.5 percent this year. Germany’s DAX Index has dropped 4.2 percent over the same period.
The second-quarter slump in Germany could well prove to be temporary. While industrial output grew less than forecast in June and factory orders fell the most since 2011, the country’s Economy Ministry said this was partly due to the mild winter.
"The usual spring rebound in construction was weaker," said Christian Schulz, senior European economist at Berenberg Bank in London. "Germany’s economy remains fundamentally strong and can rely on solid domestic demand to tide over some of the external wobbles. We expect the recovery to continue after the current setback."
That’s in line with the Bundesbank’s projections for a return to growth in the third quarter. The central bank predicts the German economy will expand 1.9 percent this year and 2 percent in 2015.
That hasn’t stopped Weidmann calling for structural changes and warning that Europe’s largest economy may lose the edge it gained after former Chancellor Gerhard Schroeder’s Agenda 2010 reformed the labor market. The jobless rate in July held at the lowest level in more than two decades.
"The need for reform in the sluggish countries should not blind us to the fact that there is a need for economic policy action here in Germany too," Weidmann said last month.
The latest euro-area data come two months after the ECB unveiled an historic package of measures including targeted long-term loans for banks and a negative deposit rate. Draghi has said that while he doesn’t expect deflation, ECB officials are unanimous in their willingness to deploy additional measures such as broad-based asset purchases if needed.
Inflation slowed to 0.4 percent in July, compared with a goal of just under 2 percent. The ECB in June forecast economic growth for the currency bloc of 1 percent this year and 1.7 percent in 2015. It will publish new staff forecasts in September.
"The prognosis isn’t particularly positive," said James Knightley, senior economist at ING Bank in London. "Even the strongest European economy is likely to suffer."