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Weak euro zone data backs Draghi's plan for more stimulus

Weak euro zone data backs Draghi's plan for more stimulus
FILE PHOTO: General view of the skyline of La Defense business district with its Arche behind Paris' landmark, the Arc de Triomphe and the Champs Elysees Avenue in Paris, France, January 13, 2016. REUTERS/Charles Platiau/File Photo -
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Charles Platiau(Reuters)
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By Leigh Thomas and Michael Nienaber

PARIS/BERLIN (Reuters) – French growth slowed unexpectedly in the second quarter on weaker household spending and German consumer morale worsened for the third month in a row heading into August, adding to signs that the euro zone economy as a whole is cooling.

The lacklustre read-out of data from the zone’s two biggest economies on Tuesday backed European Central Bank President Mario Draghi’s assessment that the growth outlook is deteriorating and the bank should inject more monetary stimulus.

In a further sign of weakness, euro zone economic sentiment deteriorated to hit its lowest level in more than three years in July, European Commission data showed on Tuesday.

“This adds to evidence from PMI data published last week that the euro zone economy will expand by a meagre 1% or so this year, strengthening the case for ECB action sooner rather than later,” said Melanie Debono from Capital Economics.

After the ECB changed forward guidance during its policy meeting last week, it is likely to cut rates in September and announce a fresh round of quantitative easing through bond buys in October, Debono added.

The French economy grew 0.2% in the April-June period, down from 0.3% in the previous three months, according to preliminary data from the INSEE statistics agency.

That was just below a Reuters poll of 28 economists, which had an average estimate of 0.3%.

Until now the French economy, the euro zone’s second largest, has proven more resilient than some neighbours such as Germany because it is less dependent on exports and thus less exposed to global swings.

But household spending, the traditional motor of French growth, grew only 0.2%, the slowest rate in a year despite a more than 10 billion euro ($11.1 billion) package of measures launched by President Emmanuel Macron to boost purchasing power.

RECESSIONFEARS

In Germany, growth is widely expected to have contracted in the second quarter and sentiment surveys suggest that the third quarter might not bring any improvement, raising the spectre of a technical recession in Europe’s largest economy.

The GfK consumer sentiment indicator, based on a survey of about 2,000 Germans, edged down to 9.7 from 9.8 a month earlier. It was the lowest reading since April 2017 and in line with market expectations.

Household spending and construction have become important drivers of growth in Germany as its exports falter in light of trade disputes and Brexit uncertainty. Domestic demand is boosted by record-high employment, above-inflation pay increases and low borrowing costs.

But the continued drop in consumer confidence signals that a slump in Germany’s export-dependent manufacturing is now creeping into other sectors of the economy.

“The trade war with the United States, ongoing Brexit discussions and the global economic slowdown continue to drive fears of a recession,” GfK researcher Rolf Buerkl said.

Consumers with jobs in export-driven sectors in particular, such as the car industry and their suppliers, are affected the most, he said. The propensity to buy as measured by the GfK also deteriorated to reach its lowest in nearly four years.

“The primary threat to consumer confidence is the persistently increasing fear of job losses,” Buerkl said. He warned that household spending could weaken in coming months if the trend continues.

In a further sign of cooling, annual consumer price inflation in July eased in five German states, preliminary data showed on Tuesday. The nationwide preliminary inflation figures are due at 1200 GMT.

(Reporting by Michael Nienaber; Editing by Andrew Cawthorne)

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