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Eurozone economy stagnates in Q2

The eurozone economy stagnated in the second quarter, official figures showed on Friday (Sep 5), in line with the poor outlook which pushed the European Central Bank into radical action on Thursday.

BRUSSELS: The eurozone economy stagnated in the second quarter, official figures showed on Friday (Sep 5), in line with the poor outlook which pushed the European Central Bank into radical action on Thursday. In a second estimate for growth in the 18-country currency zone, the Eurostat statistics body confirmed zero per cent growth from the previous quarter. It also reported slight expansion of 0.2 per cent for the full 28-country European Union.

"The second quarter stagnation in eurozone GDP clearly added to the pressure on the ECB to take further stimulative action sooner rather than later to try and dilute the risk of extended low consumer price inflation morphing into deflation," said economist Howard Archer at IHS Global Insight. Eurozone economic activity also suffered "as heightened global geopolitical tensions, particularly the Ukraine/Russia crisis, weighed down on investment," he said.

The first estimate announced in mid-August sent shockwaves across financial markets and governments desperate for growth, and put even more pressure on the ECB to take action. It did so in unexpected fashion on Thursday, when ECB president Mario Draghi produced the latest in a series of policy surprises, while also warning that the real solution was faster reforms by governments.

Concerns are growing that the European economy, after making it through the euro crisis and the prospect of the collapse of the single currency, may now be poised for years of stagnation or unduly low growth. Stunted growth in the eurozone is forcing governments to cut back their estimates for growth of gross domestic product for the rest of the year, putting budget deficit targets into jeopardy, and also clouding the outlook for growth of the global economy.

The unexpectedly low growth figure was mainly the result of a surprise 0.2-per cent shrinkage in Germany, usually the reliable eurozone growth engine, and stagnation in an already fragile French economy. Feeling the pressure, the Frankfurt-based ECB cut interest rates to a record low level on Thursday and pledged to buy hundreds of billions of euros of private sector bonds, thereby pumping much-needed cash into the economy.

However, Draghi also revealed that the ECB's policy council was split, since the decisions announced were not taken unanimously.

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The effects of the ECB's deflation-fighting measures were still being felt on Friday, with the euro still trading just below the US$1.30 mark, a key target for governments seeking to promote exports with a more favourable exchange rate.

Despite the surprise moves, economist Holger Schmieding of Berenberg Bank said the ECB could now play only a "support act" in turning around the economy, unlike the instrumental role it played in ending the debt crisis. "A lack of dynamism in France and Italy and Russia's aggression in Ukraine have interrupted the recovery. These factors are outside the ECB's control," Schmieding said. The rate cut and bond-buying "will help, but not solve all problems," he said.

The ECB also cut its forecasts for growth in the 18-country euro area this year and next, and lowered its outlook for area-wide inflation. The ECB is now pencilling in gross domestic product growth of 0.9 per cent in 2014 with inflation expected to be 0.6 per cent this year - a lower rate than the 0.7 per cent originally forecast.