The euro-area economy shrank in the second quarter after theworsening debt crisis and tougher budget cuts forced at least sixnations into recessions.

Gross domestic product in the 17-nation currency bloc fell 0.2percent from the first quarter, when it stagnated, the EuropeanUnion's statistics office in Luxembourg said today. That's in linewith the median estimate of 35 economists in a Bloomberg survey.The contraction was softened by stronger-than-forecast growth inGermany, the region's largest economy.

Europe's slump is deepening as governments struggle to restoreinvestor confidence and companies eliminate jobs. While Germany'seconomy helped to support the euro region in the first half,surveys are weakening, with a gauge of investor confidence droppingin August. The Bank of Japan today cited the euro turmoil amongrisks to its economy.

“The ongoing recession in large parts of the periphery willcontinue to hold back euro-zone growth,” said Martin Van Vliet, aneconomist at ING Bank in Amsterdam. “Any recovery will likelyremain sluggish and fragile. There are a lot of things that couldgo wrong on the crisis resolution that could derail the envisagedrecovery.”

The euro advanced 0.1 percent against the dollar and traded at$1.2346 as of 1:50 p.m. in Frankfurt.

Stocks rose after data showed Germany's economy grew 0.3 percentin the second quarter and as investors awaited a report that mayshow U.S. retail sales climbed following a three-month slump. TheStoxx Europe 600 Index gained 0.4 percent, while Germany's DAXIndex jumped 0.8 percent. Standard & Poor's 500 Index futuresexpiring in September added 0.2 percent.

The second-quarter expansion in Germany compared witheconomists' forecast for growth of 0.2 percent. While France'seconomy stalled for a third straight quarter, that was also betterthan the 0.1 percent contraction economists had predicted.

Italy's economy contracted for a fourth straight quarter,shrinking 0.7 percent. In Spain, which received external aidearlier this year, GDP dropped 0.4 percent from the first quarter,when it fell 0.3 percent. Portugal's economy contracted 1.2 percentin that period and Cyprus also remained in a recession.

The statistics office didn't release quarterly data for Irelandand Malta. Both economies contracted in the first quarter. Greece'sGDP is set to drop for a fifth straight year.

From a year earlier, overall euro-area GDP dropped 0.4 percentin the second quarter.

Economic Outlook

Recent indicators suggest the economic slump may deepen in thecurrent quarter. Euro-area services and manufacturing outputcontracted for a sixth month in July and unemployment held at arecord of 11.2 percent in June. German investor confidence fell tothe lowest this month since December 2011.

“The German economy has been softening throughout the secondquarter,” said Evelyn Herrmann, an economist at BNP Paribas inLondon. Surveys “signal that more softening in growth is to come inthe third quarter, as the resilience of the German economy toeuro-zone stress is waning.”

Deutsche Bank, Germany's largest lender, said on July 31 that itwill eliminate 1,900 jobs by the end of the year, including 1,500in the investment bank and support areas, as part of an effort tolower costs. PSA Peugeot Citroen, Europe's second-biggest carmaker,has announced 8,000 job cuts and RWE AG, Germany's second-largestutility, said today it will eliminate 2,400 further positions.

Elsewhere, retail sales in the U.S. probably rose in July forthe first time in four months, economists said before a reporttoday. The 0.3 percent increase would follow a 0.5 percent drop inJune, according to the median forecast of 85 economists surveyed byBloomberg News.

In a separate report today, the EU statistics office said thateuro-area industrial production fell 0.6 percent in June from theprevious month, when it advanced 0.9 percent. Economists in aBloomberg survey had forecast a drop of 0.7 percent. Output fell2.1 percent from a year earlier.

Heinrich Hiesinger, chief executive officer at ThyssenKrupp AG,Germany's largest steelmaker, said on Aug. 10 that customers areshowing a “high level of caution.” Commerzbank AG, Germany'ssecond-biggest bank, said last week profit will fall“significantly” in the second half.

“We still do not expect the macroeconomic and market environmentto stabilize in the second half of 2012,” Commerzbank ChiefFinancial Officer Stephan Engels said.

Policy Response

With the fiscal crisis weighing on sentiment and eroding growthprospects, policy makers have been under pressure to step upstimulus measures. The U.S. Federal Reserve pledged earlier thismonth to take new policy steps as needed to promote stronger growthand employment. The Bank of England held its key rate at 0.5percent and its bond-purchase target at 375 billion pounds ($589billion).

Some Bank of Japan board members said the central bank shouldnot dismiss any policy options in combating risks to the economyfrom the European sovereign debt crisis, the minutes released inTokyo showed today. The central bank should “stand ready to takeappropriate actions without ruling out any options in advance,”they said, according to the minutes.

European Central Bank President Mario Draghi said on Aug. 2 thatthe ECB may purchase government bonds in tandem with Europe'srescue funds to fight the crisis. The central bank in July cut itsbenchmark interest rate to 0.75 percent, a record low, and hasinjected more than 1 trillion euros ($1.24 trillion) of cheapthree-year loans to encourage lending.

The ECB's quarterly survey of professional forecasters showedthe euro-area economy may contract 0.3 percent this year instead ofa previously projected 0.2 percent. The economy will expand 0.6percent and 1.4 percent in 2013 and 2014, it said.

The euro region's statistics office is scheduled to publish abreakdown of euro-area second-quarter GDP next month.

Bloomberg News

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