By Brian Blackstone And Marcus Walker
FRANKFURT--The euro-zone economy stalled in the second quarter,
raising the ugly prospect that the region's recent weak recovery
after its long debt crisis has already lost momentum as it faces
fresh headwinds from Russia and Ukraine.
Germany's economy shrank for the first time in more than a year,
a development economists largely attributed to a mild winter that
boosted activity in the first quarter at the expense of the second.
The bigger concerns, they say, are France and Italy, where
respectable rates of growth aren't even in sight.
"The euro-zone recovery never really got going, and now it
appears to be petering out," said Simon Tilford, deputy director of
the Center for European Reform, a nonpartisan London think
tank.
The gloomy numbers out of the euro zone--whose roughly $13
trillion economy accounts for 17% of the world's gross domestic
product--join a litany of similarly sour reports this week from
Asia, all pointing to signs of sudden weakness among many major
economies.
Japan reported a sharp contraction in the second quarter as
output fell 6.8% in the wake of an April increase in the country's
sales tax. Japan's slow recovery despite heavy stimulus is in part
the result of surprisingly weak exports--a condition that stems
from soft demand elsewhere in the world and shows how weakness can
spread among economies.
In China, the central bank reported Wednesday that the broadest
measure of new lending had plunged by two-thirds in July from the
previous month, setting off alarm bells that the world's second
largest national economy might be heading for a hard landing.
Some analysts argued such concerns were overblown--July is often
a down month for credit and June's credit growth had been
exceptionally strong. Even so, the figures suggested that several
months of "mini-stimulus" spending on infrastructure,
transportation and information technology, as well as eased
liquidity by the central bank, hasn't done much to lift the
economy.
In the 18-member euro zone, GDP was flat in the second quarter
compared with the first, the European Union's statistics office
said Thursday. That translates into 0.2% growth in annualized
terms.
Over the past year, the euro zone's economy expanded just
0.7%--too slow to reinvigorate investment and job creation or to
escape the legacy of heavy public and private debts in many
countries.
German GDP shrank an annualized 0.6% from the first quarter and
Italy's output fell, too. The French economy, the bloc's second
largest behind Germany, stagnated for a second straight quarter.
Spain and the Netherlands posted some growth, but not enough to
offset weakness in the economies of their larger peers.
Germany's weak second quarter is widely seen as a hiccup: the
country is enjoying record-high employment, rising wages and
ultralow borrowing costs. A return to growth is expected in the
current quarter. Germany's Bundesbank, which has considerable
influence over the country's public opinion, made the unusual move
of responding to Thursday's data with a statement from its
economists saying the trend "remains pointed upward."
However, the continued sluggishness of business investment,
despite the country's cash-rich corporations, is a puzzle that
bodes ill for Germany's ability to lift euro-zone growth. Averaging
out the last two quarters, which evens out weather-related swings
in construction, Germany still only grew at a pace of about 1% in
the first half. And that was before the crisis in Ukraine
intensified last month, leading to growth-draining sanctions
imposed by the U.S. and EU against Russia.
"We're seeing the crisis worsen in Ukraine and Russia as well as
a difficult political situation in the Middle East," Kasper
Rorsted, chief executive of German consumer products company Henkel
AG said in an earnings call Tuesday. "The situation remains
volatile, and we don't see it changing any time soon."
France's problems are rooted more deeply, in tight fiscal
policies and long-unreformed markets. While German unemployment is
near record lows, France's is at all-time highs. A shrinking
construction sector is making things worse, forcing entrepreneurs
like Patrick Liébus to resort to innovative strategies to keep
people on the job.
Mr. Liébus has sent employees at his roofing firm in
southeastern France on a three-week vacation instead of two this
August as he doesn't have enough work for them. "After that there's
no vacation left--it's temporary layoffs or redundancy," he
said.
Some of France's largest companies are also feeling the pinch.
Construction and concession giant Vinci SA said earlier this month
it would record a slight decrease in revenue this year as it warned
the upturn in France's building market "has not yet
materialized."
European policy makers have hoped that the recovery would gather
steam of its own, so that they don't have to experiment with
controversial stimulus measures, including money-printing by the
European Central Bank or large-scale government investment
spending.
Many economists, as well as European governments, forecast
recovery will resume in the third quarter and strengthen by 2015.
Business surveys such as the purchasing managers index imply faster
GDP growth than recorded so far--an anomaly that optimists say will
be corrected this fall.
"Our view is that temporary factors dampened growth in the first
half of 2014, and this will reverse itself in the third quarter,"
said Marco Valli, chief euro-zone economist at Italian bank
UniCredit.
Mr. Valli said two risks threaten the outlook, however:
Geopolitical and trade frictions between the EU and Russia could
hurt euro-zone business sentiment; and the slowdown in global trade
and emerging-market growth could hit European exports.
But deeper worries loom, too. With each additional quarter of
near-zero growth, the bloc's vulnerabilities--weak productivity, a
stagnating labor force and fragile banking system--become more
firmly entrenched. That could make the bloc resistant to stimulus
from fiscal or monetary policies, a problem that has gripped Japan
for years.
Japan is the first modern economy to slip into persistent
consumer price declines known as deflation--a condition some
European countries now seem perilously close to entering. Japan's
18-month-old stimulus experiment is the first test of a country
attempting to wrench itself out of a deflationary slump.
"We should not wait until we all become Japan, we should act
now," said Paul De Grauwe, professor at London School of Economics.
He recommends a two-pronged approach with massive stimulus spending
by governments--particularly in Germany, France and other countries
that can borrow cheaply--buttressed by ECB purchases of public and
private debt to increase the money supply.
But the ECB has shown little appetite for such measures beyond
the cheap bank loans and record-low interest rates it has already
enacted. It argues that reforms aimed at making economies more
competitive are the answer to Europe's problems.
Last week, ECB President Mario Draghi berated governments for
their lack of progress on structural reforms. "There are stories of
young people who tried to open their business, and it takes eight
to nine months before they can do so. That has nothing to do with
monetary policy," he said.
William Horobin, Chase Gummer, Jacob Schlesinger and Bob Davis
contributed to this article.
Write to Brian Blackstone at brian.blackstone@wsj.com and Marcus
Walker at marcus.walker@wsj.com