European recovery is in trouble as German economy slows, French GDP falls

Two of the continent’s largest economies, Germany and France, released data Thursday morning which showed that their recoveries are faltering. Germany’s gross domestic product rose only 0.3 per cent in the third quarter, in line with estimates, down from 0.7 per cent in the previous quarter.

France was a bigger disappointment. Its economy contracted by 0.1 per cent in the third quarter. The data comes as a blow to president François Hollande, who faces extremely low popularity ratings and a tax revolt. Last week, France was downgraded by S&P, the American debt ratings agency, which cast doubt on the country’s growth prospects.

The wider euro zone figures confirmed that the slowdown is well in place. The 17-country region expanded by a mere 0.1 per cent in the third quarter, well down from the 0.3 per cent recorded in the previous quarter.

While the slowdown was expected, it comes as a blow to the economies which had hoped a growth revival would add jobs. The euro zone’s unemployment rate is a record 12.2 per cent. The youth unemployment rate in some countries, including Spain Italy and Greece, is two to four times higher.

The soggy growth figures come a day after the European Commission launched an inquiry into the massive trade and current account surpluses reported by Germany. The EC fears that those surpluses are dampening growth and inflation in other European countries. Last week, the European Central Bank reduced rates by a quarter point, to 0.25 per cent, in an effort to prevent disinflation from turning into outright deflation.

If France reports negative growth in the fourth quarter, it will be back in recession. Economists generally define recessions as two successive quarter of negative GDP.

In a note, ING said the French GDP figures confirm its view that France will report zero growth in 2013 after a year of stagnation in 2012. “They also show that a recovery is not imminent: private consumption will remain hampered by high unemployment while strong export-led recovery will remain unlikely before further efforts are made to increase the country’s attractiveness,” ING economist Julien Manceaux said.

ING expects a French growth rate no higher than 1.1 per cent, a figure considered too weak to bring down its 11 per cent unemployment rate quickly.

The French government, however, put on a brave face, insisting the third-quarter contraction was not an indication of a downward economic trend. “We’re at the moment where the economic machine is restarting,” finance minister Pierre Moscovici said on RTL radio. “We knew the third quarter would be a pause. It’s not a surprise, it’s not an indication of decline.

France is Europe’s second largest economy, after Germany. If its recovery remains weak, or non-existent, the recovery in the 17-country euro zone will remain anemic.

France’s grim GDP number was partly due to a 1 per cent fall in manufacturing in the second quarter, after a 2-per-cent rise in the previous quarter. Investment fell 0.6 per cent, its seventh consecutive decline. Germany investment is on the rise.

Italian figures revealed that the euro zone’s third-largest economy remains in recession, with a 0.1 per cent GDP contraction in the third quarter, and a 1.9 per cent fall year on year. The rate of contraction, however, is declining and most economists expect Italy’s recession to end by next year, though growth will be slow and wholly inadequate to put a dent in Italy 40 per cent youth unemployment rate.

“Today’s release that, whilst conditions remain tough, the [Italian] recovery is getting closer,” said ING economist Paolo Pizzoli. “However, lingering political uncertainty and, more importantly, a yet undefined picture of the fiscal composition of the stability law (the budget) under discussion in the Italian parliament may heat induce potential investors to hold the breaks.”