Eurozone economic growth stalls

The UK's recovery prospects were dealt a blow today as figures revealed the country's largest export market - the eurozone - saw a dramatic slowdown in economic growth.

The 17 countries that use the euro registered a lacklustre 0.2% growth in gross domestic product (GDP) between April and June, down from 0.8% in the previous quarter, as the previously robust German economy nearly ground to a halt.

The German economy, which is Europe's largest and makes up 27% of eurozone output, expanded only 0.1% in the quarter, against 1.3% in the first three months of the year.

Economists warned continued weak eurozone growth would lead to a disappointing performance in the UK in the third quarter, which is already affected by weak domestic demand. Britain's economy slowed to 0.2% in the second quarter, from 0.5% in the previous three months.

Chris Williamson, chief economist at Markit, said the weak eurozone data helps explain the disappointing UK performance in the second quarter, in particular the drop in manufacturing output and goods exports in June.

He went on: "With austerity measures likely to have an increasingly negative effect on domestic demand in the second half of this year, the lack of growth in key export markets suggests that the UK economic recovery will remain insipid at best until global business and consumer confidence revives."

Germany's economy has helped support the eurozone through the government debt crisis. Its companies have tapped export markets around the world, particularly in faster-growing emerging countries.

However, its growth in the second-quarter was hit by faltering construction investment and a sharp drop in energy production after the government shut down eight nuclear plants following the Fukushima reactor disaster in Japan.

Fears about excessive levels of government debt in the United States and Europe and a possible global slowdown have been weighing on markets.

The US GDP figure of 1.3% on an annualised basis in the second quarter was a disappointment, and was followed by the additional shock of a downgrade to the US's credit rating.

The French economy flatlined in the second quarter at 0%, compared to 0.9% the previous three months, while Italy's GDP strengthened to 0.3% from 0.1%.

The wider 27-member European Union also reported 0.2% growth, with Sweden and Finland posting strong quarterly growth of 1% and 1.2% respectively.

Debt-laden economies across the eurozone have seen the cost of borrowing for countries soar in recent months - most notably in Italy and Spain and the bailed out countries of Greece, Ireland and Portugal.

Lloyd Barton, senior economic adviser to the Ernst & Young Eurozone Forecast, said: "The outlook for growth in the eurozone remains subdued, with the region caught up in a new wave of sovereign debt fears.

"The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy. A further deterioration in financial conditions could severely damage the outlook for the whole of the eurozone."

PA