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Eurozone economy now contracting, recession likely

FRANKFURT — The eurozone economy officially shifted to contraction from stagnation in the second quarter of 2012, portending a recession later in the year that will put even more pressure on political leaders struggling to keep the common currency intact.

Gross domestic product fell 0.2 percent from the previous quarter in the 17 members of the European Union that use the euro, according to preliminary estimates by Eurostat, the union’s statistics agency. In the previous quarter, growth had been zero.

The decline in output, caused partly by government budget cutting, means the eurozone is likely to enter recession — broadly defined as two consecutive quarters of shrinking output — later this year. Even the German economy, which has helped compensate for weakness in Italy and Spain, seems to be losing momentum.


“Growth of the German economy was no longer strong enough to keep the total eurozone economy above the zero line,’’ Christoph Weil, an economist at Commerzbank, wrote in a note to clients.

The data add to the challenges facing eurozone leaders as they trickle back from vacation and again confront the debt crisis. Slower growth almost automatically translates into lower tax receipts, because people lose their jobs and companies earn less profit. That, in turn, puts even more stress on government budgets.

Germany grew more than expected from April through June, expanding 0.3 percent. In addition, France avoided a downturn with a third straight quarter of zero growth. Economists had predicted France would sink into negative territory. But that modestly encouraging news was outweighed by data suggesting the German economy would slow and could even decline. The Federal Statistical Office said growth in the quarter was driven by exports and consumer spending, while investment by business fell.

Surveys like the ZEW indicator of economic sentiment, which declined Tuesday to its lowest level of the year, show that German manufacturers are worried about how the eurozone crisis will play out. As a result, they are hesitating to buy new equipment.


Slower growth in the rest of the world has also hurt demand for exports from Germany and other European countries like Finland, where growth fell 1 percent in the quarter. Italy and Spain, which have the number three and number four economies in the eurozone, after those of Germany and France, remained mired in recession. The Italian economy shrank 0.7 percent, while Spain declined 0.4 percent. Neither country has had any economic growth for more than a year.

Germany is being affected by slack demand from the rest of the eurozone, which remains its biggest market. In the first quarter of 2012, the German economy grew 0.5 percent from the fourth quarter of 2011.

The German central bank has predicted modest growth during the rest of 2012, but some economists disagree. Recent figures have shown a decline in German industrial production and a slump in factory orders.

Spain, Italy and other troubled countries have begun taking steps to improve growth by deregulating their labor markets, removing barriers to entrepreneurship, and taking other measures. But such changes typically take years to bear fruit and in the meantime stir political turmoil because of resistance from unions and other interest groups.