2Q GDP flash: +0.2% q/q, +1.7% y/y

MNI survey median: +0.3% q/q, +1.8% y/y
MNI survey range: +0.2% to +0.5% q/q

1Q GDP +0.8% q/q (unrevised)
4Q GDP: +0.3% q/q (unrevised)
3Q GDP: +0.4% q/q (unrevised)
–

PARIS (MNI) – Eurozone economic growth slowed more than generally
expected in 2Q to 0.2%, the weakest pace since the recession ended in 3Q
2009, Eurostat estimated Tuesday.

Before disappointing results for Germany were released this
morning, most analysts had expected quarterly Eurozone growth of at
least 0.3%

The unwinding of stimulus measures that boosted 1Q activity has
been accentuated by slowing global demand and financial market tensions
that could continue to weigh on growth in the second half unless the
erosion in business sentiment is arrested.

Most of the large economies sustained a slowdown in 2Q. In Germany,
activity ground to a near halt, with GDP growth of only 0.1% after +1.3%
in 1Q. Activity was stagnant in France after +0.9%. Growth in Spain
eased to 0.2% from 0.3%. Only Italy bucked the trend with a pick-up to
0.3% from 0.1%.

Among the smaller reporting economies, 2Q growth was solid in
Belgium (+0.7%), Slovakia (+0.9%), Austria (+1.0%), Finland (+1.2%) and
Estonia (+1.8%). Only the Netherlands suffered a marked setback (+0.1%
after +0.8%). Cyprus returned to positive growth (+0.4% after flat),
while Portugal shifted out of negative territory (flat after -0.6%).

As usual, Eurostat provided no information on GDP components with
its flash estimate. Eurozone industry continued to lose steam in 2Q,
expanding by only 0.3% after +0.9% in 1Q and +1.8% in 4Q. With capacity
utilization easing in industry, investment growth no doubt weakened
after the 2.1% rebound in 1Q. Construction activity in April-May was up
0.4% vs 1Q, which had rebounded by 1.3%.

On the expenditure side, private consumption was no doubt weaker,
since costlier food and energy eroded real earnings. The 0.7% plunge in
France after car-buying subsidies expired was an extreme case, but
consumption had a negative impact in Germany and perhaps Spain as well.
Eurozone retail sales contracted by 0.3% in 2Q.

Due to the sharp drop in Eurozone trade flows in June, goods
exports rose only 0.3% in nominal seasonally adjusted terms in 2Q, while
imports fell back 0.2%. The adjusted trade deficit narrowed from E7.2
billion in 1Q to E4.9 billion. Foreign trade had a negative impact on
German GDP growth but a positive impact in France and no doubt in other
countries were domestic demand was sluggish.

Until recently, 2Q was expected to be a soft patch in the Eurozone
recovery, due to fallout from Japan’s disasters and the rapid rise in
energy and other commodity costs. While these effects are indeed waning,
headwinds are mounting that could accentuate the economic downshift or
even derail the upswing.

Global demand is losing traction as many emerging economies apply
monetary brakes to curb inflation and the US struggles to shake off the
recession. While German industry may have enough orders on hand to coast
through a dip in demand, peripheral countries counting on export growth
to offset the fiscal squeeze will suffer more.

Financial market tensions within the Eurozone could take a bigger
toll if producers and investors take to the trenches until the storm
blows over. Analysts at UniCredit now see “a rising risk that the
recovery will come to a complete halt” in the second half.

“We are aware that a further escalation of market turbulence has
the potential to lead to a negative GDP reading in the final quarter of
the year,” said UniCredit economist Marco Valli last week.

Leading indicators have tumbled rapidly in recent months. The
factory PMIs showed output stagnant in July (50.2), and the accelerating
decline in new orders (47.6) suggests a downturn is looming. While the
services were still expanding slowly (51.6) and receiving new business
(51.2), the rapid loss of momentum in only two months suggests the floor
has not been reached.

Chilling business sentiment in a climate of widespread social
unrest, where most consumers can look forward only to rising taxes and
further cutbacks in social services, could feed on itself unless EU
leaders manage somehow to break the spell of pessimism.

With unemployment still high and wage gains barely keeping up with
prices, consumption is unlikely to gain much momentum in coming months.

The downside surprise in 2Q will oblige forecasters to revisit
their scenarios for the full year. Analysts at BNP Paribas and RBS now
expect quarterly Eurozone growth of only 0.1% in the second half of this
year.

Last month, the IMF confirmed its forecast for Eurozone growth of
2.0% this year and 1.7% next year. Professional forecasters surveyed by
the ECB last month were on balance somewhat less optimistic, as the
median forecast was for +1.9% this year and +1.6% in 2012. The ECB
staff’s own projections from June gave a mid-points for GDP growth of
1.9% and 1.7%, respectively.

–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com

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