Eurozone avoids double-dip recession as Germany makes up for losses

Unexpectedly strong performance by Europe's biggest economy helps compensate for weaker output in Greece, Italy and Spain

The crisis-hit eurozone avoided a double-dip recession by the narrowest of margins in the first three months of 2012 as an unexpectedly strong performance by Germany compensated for plunging activity in countries wilting from tough austerity programmes.

Underlining the two-speed nature of the 17-nation single currency area, the 0.5% expansion in Europe's biggest economy helped to compensate for weaker output in Greece, Italy and Spain.

Growth in the eurozone stagnated in the first quarter of 2012 following the 0.3% decline recorded in the final three months of 2011 – just avoiding the two successive quarters of falling output that would have officially signalled a double-dip recession.

Analysts warned, however, that the respite could be short-lived, with the latest flare-up in Europe's long-running sovereign debt crisis likely to damage growth prospects for the rest of the year.

Figures released in European capitals on Tuesday showed that Germany – which accounts for 27% of eurozone GDP – bounced back from a 0.2% drop in output in late 2011, while France followed growth of just 0.1% with a quarter of stagnation in early 2012. In the year to the end of March 2012, Germany grew by 1.2% and France by 0.3%.

Other countries to post quarterly growth included Finland (1.3%), Austria (0.2%), Belgium (0.3%) and Slovakia (0.8%).

But tough austerity measures took their toll on Italy, where the 0.8% quarterly drop in output was the third in a row; Spain, which saw activity decline by 0.3% for a second quarter; and Greece, which reported that the economy was 6.2% smaller at the end of the first quarter of 2012 than a year earlier.

The Netherlands also posted a third consecutive quarter of negative growth, with activity down by 0.2% in the first quarter of 2012.

Overall, the eurozone economies have shown no growth in the past year, while the 27-nation European Union has seen output increase by just 0.1%.

Chris Williamson, economist at Markit, said the outcome had been slightly better than the forward-looking surveys of business activity had indicated. "However, the better outcome largely reflected a surprisingly strong GDP gain in Germany, and the rest of the region is clearly struggling, with marked downturns taking place in the periphery. The business surveys also suggest these downturns gathered momentum at the start of the second quarter."

Williamson added: "The diverse economic trends across the region highlight the policy dilemma at the European Central Bank, where downturns in the periphery suggest more stimulus is required, but such stimulus would risk stoking inflation in stronger-performing Germany.

"However, given the signs of weakness spreading from the periphery to Germany in recent months, the likelihood is the German economy may soon also succumb to weak consumer and business confidence, resulting in a more even picture of economic weakness across the region in the summer.

"Germany is still likely to remain the best performer, but that may not necessarily mean it will not also see a contraction of GDP in the second quarter."

With UK trade figures on Tuesday showing exports to Europe down by £800m in May, the chancellor, George Osborne, said: "This is a time of considerable uncertainty in the eurozone economies and that uncertainty is undermining the entire European recovery. I think we are reaching a point where we have got to make a decision to see the eurozone stand behind their currency."

Ed Balls MP, Labour's shadow chancellor, said: "With Germany, France and the eurozone as a whole avoiding recession, it's now clear that Britain's double-dip recession was made in Downing Street by David Cameron and George Osborne's failed economic policies.

"In the 18 months since George Osborne's spending review, Britain has been outperformed by most European countries. And without exports to Europe and the rest of the world Britain would have been in recession a year ago. The chancellor has now run out of excuses for why his reckless and unfair policies have failed."


Larry Elliott, economics editor

The GuardianTramp

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