Why Europe’s Economy still fragile?

Europe’s fragile recovery is stalling, a batch of economic data showed this week, with analysts warning that France, with the Eurozone’s second-biggest economy, could be slipping into another downturn.

Europe Business

Even the eurozone’s economic powerhouse Germany—whose performance is increasingly divergent from laggard France—is starting to show signs of slowing growth and posted the lowest inflation for four years at 0.9%.

This adds to concerns that the spectre of eurozone deflation is coming closer.

Just a month ago, EU Economic Affairs Commissioner Siim Kallas sounded the all-clear for the bloc’s economic health, saying that a “recovery has taken hold”.

With Portugal joining Ireland in exiting a billion-euro bailout programme, and even Greece successfully raising money on the markets, the eurozone was looking to put its debt crisis behind it.

Analysts have backed this up from the standpoint of monetary policy, saying that decisions by the European Central Bank in the last two years to underpin the eurozone debt market have doused the debt crisis.

But, almost as quickly, data has emerged suggesting that the fallout from that crisis still weighs heavily on confidence, investment and growth.

The outlook for the French economy suffered several setbacks this week: official data showed a high payments deficit, a leading survey suggested that output is shrinking, and the state statistics agency forecast weaker growth than expected for 2014.

On Friday, the agency said the economy stagnated in the first quarter, and on Thursday official data showed a new rise in unemployment to a record 3.388mn people.

“France risks getting left behind in the eurozone economic recovery,” said Christian Schulz, a Berenberg bank analyst.

“While the former crisis countries in the south have caught up with the Eurozone average in sentiment indicators, France has fallen behind,” he said, referring to a survey on overall eurozone business activity. The survey found that leading indicators across the zone had slipped from 53.5 points on the index in May to 52.8 points in June, still above the 50-point expansion level, but a setback at a point in the recovery cycle when it should be rising.

Chris Williamson, the chief economist at Markit Economics, which ran the survey, said: “France appears to be entering a renewed downturn after GDP (gross domestic product) stagnated in the first quarter.”

That survey showed business activity in France slumping to 48.0 points from 49.3 points, below the 50-point line which marks the difference between expansion and shrinkage of the economy.