The ANNOTICO Report

Italy out of recession in 2nd quarter, but Germany stalls

San Diego Union Tribune
Sign on San Diego
By Brian Love, European Economics Correspondent
REUTERS
August 11, 2005
PARIS – Europe's economy lost much of what spark it had in the second quarter as Germany failed to repeat its early-year show of strength, but Italy shook off recession and the Netherlands made a strong comeback.
Economists stuck to the view that mainland Europe is staging a moderate recovery after a poor performance in the three months to end-June, scenting improvement to come in the skimpy details of the German data as well as the other news of the day.
Gross domestic product in Europe's largest economy stagnated at first-quarter levels and the German Federal Statistics Office scaled down its estimate of growth for the first three months, to 0.8 percent from 1.0 percent.
Italy's statistics office reported a 0.7 percent increase in GDP which was more than three times as big as expected after two consecutive quarters of shrinkage that had sent the euro zone's third largest economy into recession.
MM Warburg economist Christian Jasperneite was one of many to highlight rising domestic demand in the second quarter in the German economy, which has run for years on one engine only, exports.
"If you look behind the scenes, the foundation has been laid for a new upswing," he said "There are definitely very good times ahead of us."
UBS's Holger Fahrinkrug was more wary, saying that there was no hard detail for now and rising oil and energy prices, lower pension payouts and talk of cuts in holiday bonuses could turn consumers off spending more of their money.
The Netherlands, whose fortunes are closely linked to the German economy next door, reported an apparently strong comeback with quarterly growth of 1.2 percent in the second quarter after its economy shrank 0.8 percent in the first.
Spain, the largest of the mid-sized euro zone economies and more dynamic in recent years, announced an expected 0.9 percent quarterly rise in GDP for the second quarter.
SLOW EURO ZONE
A second-quarter GDP estimate was also due for the 12-nation euro zone, ahead of what are expected to be weak French figures on Friday, and a GDP report in Japan that is expected to show improvement.
The euro zone second-quarter figure was forecast by analysts to hit about 0.2 percent on a quarterly basis and one economist suggested the first-quarter figure might be revised down to 0.4 from 0.5 percent after Germany's revision.
Elsewhere, Switzerland on the euro zone's borders reported a steeper-than-expected drop in consumer confidence in July as the third quarter got going, with an index issued by the State Secretariat for Economic Affairs sliding to -15 from -9.
Growth in the euro zone hit 2 percent last year when world economic output was rising more than twice as fast. Euro zone growth has not topped 2 percent since 2000, when the dot.com bubble burst, ending years of heady expansion in many countries.
Finance ministers are for now counting on GDP growth of 1.3 percent this year in the single currency area after repeatedly cutting their forecast. High unemployment remains a big problem for governments with elections looming, in Germany this year, Italy in 2006 and France the year after.
Britain, which is outside the euro zone and has long enjoyed annual growth rates of closer to 3 percent, is slowing, and showed growth of 0.4 percent quarter-on-quarter in both the first and second quarters of this year.
That compared to a still solid 0.8 percent second-quarter growth rate for the United States, according to the OECD, which crunches different national accounting methods to produce comparable figures across the globe.
BLACK BULLION RISK
Oil prices, considered one of the main threats to growth, hit a record of more than $65 per barrel on Thursday, driven by speculation over supplies needed to meet U.S. demand and Saudi Arabia's long-running battle with al Qaeda militants.
That's roughly $20 higher than a year ago and is starting to spark concern among households and businesses as it raises the price of energy for industry, home heating and transport.
The European Central Bank sounded a relatively upbeat note in its monthly bulletin, saying that the economy was gradually gaining strength while voicing some concern about the dampening impact oil and fuel costs could have on household spending.
"While the rise in oil prices has weighed on domestic demand, the latest available economic data and survey indicators show some improvement," the ECB said in the editorial of the bulletin.
The ECB has kept interest rates on hold at 2.0 percent despite pressure to cut to bolster economic growth.
Stock markets across the world are surging despite the oil risk as companies generally report better profits than expected for the second quarter, keeping analysts guessing as to when the cost of oil will really hurt.
(With reporting from Berlin, Zurich, Madrid, Amsterdam, Rome and Frankfurt)
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