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Sliding German output bodes ill for eurozone

A manufacturing worker in Germany. The country’s economic growth has stagnated, according to a new report.Ben Kilb/New York Times/File

PARIS — An important reading on the health of the eurozone economy is expected to show this week that growth stagnated in the most recent quarter as German output faltered, confirming the assessment of many analysts that a lasting recovery remains out of reach for the region.

Economists are expecting that in the 18-nation currency bloc, gross domestic product expanded 0.1 percent in the second quarter compared with the first quarter, equivalent to an annual rate of growth of 0.4 percent. The eurozone eked out quarterly growth of 0.2 percent in the first three months of the year.

The eurozone GDP report, to be released Thursday by the European Union statistical agency, Eurostat, is based on data from before the latest tensions about Ukraine and before the sanctions against Russia for its involvement in the crisis began to be felt. That means there are plenty of questions hanging over the second half of the year.

Most worrying are the indications that Germany is beginning to struggle, including a steep drop in economic sentiment reported Tuesday. Germany, which accounts for more than one-fourth of the overall eurozone economy, had been propping up the rest of the area for much of the last few years.


On Tuesday, a report from the ZEW economic research institute in Mannheim, Germany, showed German economic sentiment fell this month to the lowest level since December 2012. The drop, the report said, “is likely connected to the ongoing geopolitical tensions that have affected the German economy.”

The setback followed a warning from the Organization for Economic Cooperation and Development on Monday that its analysis showed “growth losing momentum” in Germany and an official report last week that showed German factories produced far less than expected in June.

The gloomy sentiment in Germany is a “signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend,” said Carsten Brzeski, an economist with ING Group in Brussels.


A further slowing in Europe would have serious implications for the rest of the world amid concerns about the US economy, which began 2014 with a rocky start before posting modest growth, and Japan, which is thought to have contracted sharply in the second quarter.

Stanley Fischer, the Federal Reserve vice chairman, told a conference in Stockholm on Monday that the European slowdown had been an important factor holding back growth in the United States.

Still, he estimated that German growth was flat in the second quarter, taking a more optimistic line than many others, who predicted a slight contraction. Besides the geopolitical strains, Germany’s weakness resulted from damp demand from eurozone trading partners and one-time factors including statistical distortions caused by unusually mild weather in the first quarter, he said.

“Up to now, the fallout of the Ukraine crisis has been limited to a general return of uncertainty and a sharp drop in German exports to Russia,” Brzeski said. “Obviously, a further escalation of the crisis could start to really hurt the economy. This is why strengthening domestic demand, particularly domestic investment, should continue to be a top priority for all policy makers.”

The dispute between the West and Russia about Ukraine has led to tit-for-tat sanctions from the United States and Europe on the one hand and Russia on the other. While Russia’s share of the global economy is small, about 3 percent, it is one of Germany’s 10 largest trading partners, according to the Association of German Chambers of Commerce and Industry, and nearly 300,000 German jobs depend on exports to Russia.


Analysts at Natixis, a French bank, estimated that a 30 percent drop in exports to Russia this year would shave “a modest 0.3 percentage points” from Germany’s economic growth.

Italy has fallen back into recession, and France, the second-largest eurozone member after Germany, appears moribund.