Rebounds in France, Germany, stoke hopes of rise for European economy

LONDON — Government programs to support the auto industry helped Germany and France return to economic growth in the second quarter, rebounds that stoked hopes the recession in the wider 16-country euro area may also end sooner than thought.

LONDON — Government programs to support the auto industry helped Germany and France return to economic growth in the second quarter, rebounds that stoked hopes the recession in the wider 16-country euro area may also end sooner than thought.

Europe’s two biggest economies each saw growth of 0.3 per cent from the previous three-month period, surprising analysts’ expectations for equivalent declines and technically ending their worst recession in decades.

The French and German increases marked a stunning turnaround from the previous quarter, when Germany shrank by a massive 3.5 per cent and France contracted by 1.3 per cent.

The unexpected increases in Germany and France meant that the 16-country euro area contracted at a sharply reduced rate of 0.1 per cent, much less than the 0.5 per cent anticipated in the markets.

Though the euro zone drop was the fifth straight quarterly decline, it was a marked improvement on the record 2.5 per cent fall recorded in the first quarter and was even better than the 0.3 per cent quarterly decline recorded in the U.S., the world’s single largest economy.

France’s Finance Minister Christine Lagarde credited the government-backed stimulus plan for the auto industry for the country’s ability to weather the economic storm and return to growth.

“France is finally coming out of the red,” she said on RTL radio.

Countries across Europe have established so-called “cash for clunkers” programs in the hope that wary consumers will trade in their old cars for newer and more efficient models — in the process kick-starting the economy.

Unicredit economist Andreas Rees reckons that the export-dependent auto sector contributed 0.25 per centage point to overall German GDP growth.

Despite the apparent benefits, Europe’s economy is not out of the woods yet — it still faces the prospect of a marked rise in unemployment when programs to support workers putting in reduced hours end, and worries about what happens after the expiration of the auto incentives.

And recovery would start from a much lower base level — the euro zone economy is 4.6 per cent smaller than a year ago and that could take two to three years of solid economic growth to make up.

Nevertheless, Thursday’s figures will likely surprise policy-makers at the European Central Bank. As recently as last week, the central bank’s president Jean-Claude Trichet said the recession would likely continue until next year at least.

The better than expected performance helped the euro bounce half a per centage point to $1.4270.

Much will depend on what happens in the currency markets over the coming months. Europe’s manufacturers will not have been pleased that the euro has consolidated above $1.40 after having fallen toward $1.25 earlier in the year — a higher euro makes euro zone products more expensive in export markets.

The signs so far are that exporters in Germany, the euro zone’s biggest single economy, have managed to offset the impact of the higher euro amid rising global demand. Government figures last week showed that German exports were up 7 per cent on the month in June, their biggest rise in nearly three years.

Other countries may not be as capable as Germany at offsetting the negative euro impact, analysts cautioned.

“Whilst German exporters may be able to absorb a rising euro, given that their high-end produce faces less competition than those of their neighbours, it is doubtful whether France and Italy can without suffering much pain,” said Neil Mellor, analyst at the Bank of New York Mellon.

Economists also stressed that the road to recovery will not be straightforward — especially as much of the improvement in Germany and France was due to very sharp falls in imports, which reduced trade deficits and lessened the GDP reduction stemming from the net trade balance.

In addition, they said rising unemployment will continue to rein in consumer demand.

“With output unlikely to return to pre-recession levels in the medium term, unemployment may become a serious drag on the euro area’s economic performance,” said Jorg Radeke, economist at the Centre for Economic and Business Research in London.

The contrasting economic performances among the euro member states are likely to cause headaches for the European Central Bank, said Radeke.

While Germany and France saw output rise in the second quarter, other euro zone countries remain mired in recession, including Italy, which saw GDP fall another 0.5 per cent, and the Netherlands, where GDP dropped 0.9 per cent. Figures Friday could well show Spain contracted a further 1 per cent as its economy reels from a near 20 per cent unemployment rate.

The EU as a whole, including countries that don’t use the euro such as Britain and Sweden, saw output drop 0.3 per cent in the second quarter from the previous three month period. Britain dragged the rate lower with a 0.8 per cent decline.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

There were six additional deaths across Alberta reported over the past 24 hours, bringing the death toll to 1,926 since the beginning of the pandemic. (File photo)
AstraZeneca vaccine is ready to be used at a homeless shelter in Romford, east London, Wednesday, Feb. 3, 2021. THE CANADIAN PRESS/AP-Frank Augstein
AstraZeneca-linked blood clot confirmed in Alberta

A case of an AstraZeneca-linked blood clot has been confirmed in Alberta,… Continue reading

The Red Deer Catholic Regional Schools Board of Trustees selected the name St. Lorenzo Ruiz Middle School to be built in the north end of Red Deer. (Photo Courtesy of  Red Deer Catholic Regional Schools)
Red Deer Catholic Regional Schools raises about $8,720 for Terry Fox Foundation

Red Deer Catholic Regional Schools raised about $8,720 for the Terry Fox… Continue reading

A nurse gets a swab ready at a temporary COVID-19 test clinic in Montreal, on Friday, May 15, 2020. Health Canada has reversed course on home test kits for COVID-19, saying it will now review applications for such devices. THE CANADIAN PRESS/Paul Chiasson
Alberta declines Ontario’s request to send health-care workers

Alberta is “not in a position” to send health-care workers out of… Continue reading

The Red Deer Rebels allowed four straight goals from the Medicine Hat Tigers Friday night on the road. (Photo by Rob Wallator/ Red Deer Rebels)
Tigers hand Red Deer Rebels 10th straight loss

Tigers 4 Rebels 2 Through 17 games in the shortened WHL season,… Continue reading

Red Deer Public Schools will not pilot the new draft curriculum at its elementary schools. (File photo contributed by Red Deer Public Schools)
UPDATED: Red Deer Public Schools says no to piloting new curriculum

Alberta Teachers’ Association support school boards

Ontario Premier Doug Ford points on a COVID-19 caseload projection model graph during a press conference at Queen's Park, in Toronto, Friday, April 16, 2021. Ontario was set to backtrack on controversial new police powers to enforce stay-at-home orders implemented in the battle against COVID-19.THE CANADIAN PRESS/Frank Gunn
Ford backtracks on new police COVID-19 powers amid intense backlash

TORONTO — Furious criticism of new anti-pandemic powers that allow police in… Continue reading

The official program for the National Commemorative Ceremony in honour of Prince Philip, The Duke of Edinburgh, sits on an empty pew prior to the ceremony at Christ Church Cathedral in Ottawa on Saturday, April 17, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Prince Philip remembered as ‘a man of great service’ during Canada’s memorial service

Canada’s commemorative ceremony in honour of the late Prince Philip offered a… Continue reading

CF Montreal head coach Wilfried Nancy speaks to his players during the team's practice Tuesday, March 16, 2021 in Montreal. THE CANADIAN PRESS/Ryan Remiorz
CF Montreal puts on a show, defeating Toronto FC 4-2 in MLS season opener

FORT LAUDERDALE, Fla. — CF Montreal, carving open Toronto FC’s defence, cruised… Continue reading

Demonstrators using umbrellas as shields approach a point in a perimeter security fence during a protest over the fatal shooting of Daunte Wright during traffic stop, outside the Brooklyn Center Police Department, Friday, April 16, 2021, in Brooklyn Center, Minn. (AP Photo/John Minchillo)
Journalists allege police harassment at Minnesota protests

Some journalists covering protests over the police fatal shooting of Daunte Wright,… Continue reading

A container ship is docked in the Port of Montreal, Wednesday, February 17, 2021 in Montreal.THE CANADIAN PRESS/Ryan Remiorz
Montreal dockworkers begin weekend strikes as talks drag on

MONTREAL — Dockworkers at the Port of Montreal kicked off a series… Continue reading

Brad Dahr, 53, is facing numerous charges. (Photo contributed by Alberta RCMP)
Alberta man charged for alleged sexual offences against children

An Edmonton man has been charged for alleged sexual offences against children… Continue reading

A person walks past a COVID-19 mural designed by artist Emily May Rose on a rainy day during the COVID-19 pandemic in Toronto on Monday, April 12, 2021. Employment lawyers say flouting COVID-19 public health orders when off the job or coming into work while knowingly sick could warrant discipline in the workplace. THE CANADIAN PRESS/Nathan Denette
Risky pandemic behaviour off the clock could mean workplace discipline: lawyers

CALGARY — Employment lawyers say flouting COVID-19 public health orders when off… Continue reading

Vials containing Russia's Sputnik V vaccine for COVID-19 are seen at the San Marino State Hospital, in San Marino, Friday, April 9, 2021.  THE CANADIAN PRESS/AP-Antonio Calanni
China, Russia using their COVID-19 vaccines to gain political influence

OTTAWA — China and Russia have been using their locally produced COVID-19… Continue reading

Most Read