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

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

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

“The ongoing recession in large parts of the periphery will continue to hold back euro-zone growth,” said Martin Van Vliet, an economist at ING Bank in Amsterdam. “Any recovery will likely remain sluggish and fragile. There are a lot of things that could go wrong on the crisis resolution that could derail the envisaged recovery.”

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 percent in the second quarter and as investors awaited a report that may show U.S. retail sales climbed following a three-month slump. The Stoxx Europe 600 Index gained 0.4 percent, while Germany's DAX Index jumped 0.8 percent. Standard & Poor's 500 Index futures expiring in September added 0.2 percent.

The second-quarter expansion in Germany compared with economists' forecast for growth of 0.2 percent. While France's economy stalled for a third straight quarter, that was also better than 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 aid earlier this year, GDP dropped 0.4 percent from the first quarter, when it fell 0.3 percent. Portugal's economy contracted 1.2 percent in that period and Cyprus also remained in a recession.

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

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

Economic Outlook

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

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

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

Elsewhere, retail sales in the U.S. probably rose in July for the first time in four months, economists said before a report today. The 0.3 percent increase would follow a 0.5 percent drop in June, according to the median forecast of 85 economists surveyed by Bloomberg News.

In a separate report today, the EU statistics office said that euro-area industrial production fell 0.6 percent in June from the previous month, when it advanced 0.9 percent. Economists in a Bloomberg survey had forecast a drop of 0.7 percent. Output fell 2.1 percent from a year earlier.

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

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

Policy Response

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

Some Bank of Japan board members said the central bank should not dismiss any policy options in combating risks to the economy from the European sovereign debt crisis, the minutes released in Tokyo showed today. The central bank should “stand ready to take appropriate actions without ruling out any options in advance,” they said, according to the minutes.

European Central Bank President Mario Draghi said on Aug. 2 that the ECB may purchase government bonds in tandem with Europe's rescue funds to fight the crisis. The central bank in July cut its benchmark interest rate to 0.75 percent, a record low, and has injected more than 1 trillion euros ($1.24 trillion) of cheap three-year loans to encourage lending.

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

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

Bloomberg News

Instant Insights /

Euro-Area Economy Shrinks in Q2

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