Stagnation in Germany slows Eurozone growth

Economic growth in the eurozone slowed in the second quarter as the German economy stagnated despite a strong performance at the beginning of the year. Meanwhile, Italy emerged from recession and the Netherlands bounced back strongly in the three months to June.

The dozen-nation eurozone lost much of its spark yesterday as figures from the European statistics office, Eurostat, revealed a slowdown in economic growth to 0.3 per cent in the second quarter, from 0.5 per cent in the first three months of the year.

Economists stuck to their view that a moderate recovery was under way in mainland Europe. The European Commission forecast eurozone growth of 0.4 to 0.8 per cent for the fourth quarter, thanks to a weaker euro, and 0.2 to 0.6 per cent for the third quarter.

Germany, Europe's largest economy, showed no growth, failing to repeat its show of strength in the first three months of the year when it posted 0.8 per cent growth. Christian Jasperneite, at MM Warburg, highlighted that domestic demand was rising in Germany, which has relied on exports for years. "The foundation has been laid for a new upswing," he said.

The day before, the Governor of the Bank of England, Mervyn King, said Germany appeared to have "turned the corner". In its monthly bulletin out yesterday, the European Central Bank said the eurozone economy was gaining strength, while voicing concern that rising oil and fuel costs could weigh on household spending.

Italy surprised economists with a 0.7 per cent increase in GDP - more than three times as much as expected. The rise came after two successive quarters of contraction in Europe's No 3 economy.

The Netherlands also made a strong comeback with quarterly growth of 1.2 per cent, after shrinking 0.8 per cent in the first quarter. Spain lived up to analysts' expectations with a 0.9 per cent rise in GDP.

The eurozone expanded only 2 per cent last year, when world economic output was rising more than twice as fast. Finance ministers are now counting on GDP growth of 1.3 per cent this year in the single currency area after repeatedly cutting their forecast.

High unemployment remains a problem as elections loom in Germany in September, in Italy next spring and in France in 2007 - making it riskier for governments to pursue badly needed, but unpopular, economic reforms.