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.

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