Coverage: European economy still dragging

The European recovery isn’t as strong as expected. Germany, France and Italy reported bleak economic numbers on Thursday, and with more turmoil in the global landscape, it may be a while before things return to normal.

David Jolly had this piece for The New York Times:

This was supposed to be the year that the European economy decisively broke free of its shackles. But after a dismal round of economic growth reports on Thursday, the main question appears to be whether the eurozone will avoid tumbling back into recession.

Germany and Italy both contracted 0.2 percent in the second quarter, compared with the first, official data showed, and the French economy stagnated yet again. The region was beginning to falter even before the latest round of tit-for-tat sanctions with Russia over Ukraine further clouded the outlook.

With the Continent’s three main engines sputtering, the gross domestic product of the 18-nation eurozone did not expand at all from the first quarter of this year, when it grew only 0.2 percent. The latest figure from Eurostat, the European Union statistics agency, equates to a meager 0.2 percent annual rate.

“It’s fairly clear that the eurozone recovery is coming apart at the seams,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, as most of the bloc is either “in recession or flirting with it now.”

The Wall Street Journal story by Brian Blackstone and Marcus Walker said that the weak Euro numbers mirrored those from around the world:

The gloomy numbers out of the euro zone—whose roughly $13 trillion economy accounts for 17% of the world’s gross domestic product—join a litany of similarly sour reports this week from Asia, all pointing to signs of sudden weakness among many major economies.

The downturns in Europe and Asia come as the U.S. flashes signs of increasing economic vigor after a brief chill earlier this year. The U.S. economy grew in the second quarter by an annual rate of 4%, thanks to stronger consumer spending and corporate investment. Despite tepid wage gains, U.S. firms have been on the strongest sustained hiring stretch since 2006, adding more than 200,000 jobs each month since February.

But the growing sense of optimism in the U.S. contrasts with deepening uncertainty in many other parts of the world.

Mexico’s central bank lowered its growth forecast for 2014 to 2.4% from 2.8% on Wednesday. Japan reported a sharp contraction in the second quarter as output fell 6.8% in the wake of an April increase in the country’s sales tax. Japan’s slow recovery, despite heavy stimulus, is in part the result of surprisingly weak exports—a condition that stems from soft demand elsewhere in the world and shows how weakness can spread among economies.

In China, the central bank reported Wednesday that the broadest measure of new lending had plunged by two-thirds in July from the previous month, setting off alarm bells that the world’s second-largest national economy might be heading for a hard landing.

Bloomberg’s Alessandro Speciale had this background about the struggles in the economy and the steps the European Central Bank has undertaken to try and fix things:

The euro area is struggling to recover from its longest-ever recession, which ended last year. Inflation in the currency bloc was 0.4 percent in July, and has been stuck at less than half the European Central Bank’s goal of just below 2 percent since October. The central bank’s Survey of Professional Forecasters today showed analysts downgrading their price outlook for 2014 and 2015.

The ECB announced an unprecedented package of stimulus measures in June, including a negative deposit rate and targeted loans for banks. President Mario Draghi warned last week that “heightened” political risks could affect the region’s “weak” recovery.

At the same time, he called for countries to implement structural reforms, saying those that have done so are recovering faster. Spain’s economy expanded last quarter at its quickest pace since 2007, beating Germany for the first time in five years. Greece’s economy contracted at its slowest pace in almost six years.

“It’s more a return to reality for the euro area, a wake-up call, that you have to do more, especially in France and in Italy,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. “Otherwise maybe already next year, if stagnation continues and growth doesn’t materialize, you could have a return to the crisis no matter what the ECB does. This is not our baseline scenario, but medium-term risks have increased.”

While the U.S. may be slowly improving, the rest of the world hasn’t gotten the memo that it’s time to start expanding. Slow growth or even a contraction in so many markets should make investors nervous. Many fund managers have expanded into overseas holdings to find yield. But now that play may not be working, especially as assets remain stagnant. With so many across the globe relying on their own investments for retirement, the grim numbers are something to give everyone pause.