Stormy Outlook

The 15-member euro zone contracted by 0.2 percent during the three months to the end of June, the European Commission's Statistics Office Eurostat said Thursday, Aug. 4. High inflation hit consumer spending and a strong euro as well as weaker global growth undercut the currency bloc's export machine

"The euro-zone economy is on the edge of a recession," said Commerzbank economists Christoph Weil and Michael Schubert in a note to clients.

The euro zone grew quarter on quarter at 0.7 percent during the first three months of the year.

The second-quarter growth rate was in line with analysts' forecasts.

At the same time, year-on-year growth in the euro zone slipped back from 2.1 percent in the first quarter to 1.5 percent in the three months to the end of June, Eurostat said.

But a spokeswoman for Europe's Economic and Monetary Affairs Commissioner Joaquin Almunia said fears about a recession were overplayed.

"The signs for the future are not very good if you look at the confidence indicators," spokeswoman Amelia Torres said. But added that "it is a bit exaggerated to use the word (recession)."

Germany not as bad as expected

Earlier in the day the euro zone's two biggest economies also reported a contraction in the second quarter, with the German economy shrinking by a less-than-forecast 0.5 percent after the currency bloc's biggest economy grew at a revised 1.3 percent during the first quarter.

Nevertheless, it was the first fall in the German economy in almost four years.

Data published Thursday showed economic growth in France slowing from 0.4 percent during the first quarter to a bigger-than-forecast 0.3-percent slump in the latest three months.

The second-quarter contraction in France represented the first time in about five years that the economy has shrunk in the euro zone's second biggest member.

However, recently a steady stream of gloomy economic sentiment surveys and downbeat economic numbers has helped to raise concerns about the outlook for the European economy.

Inflation worries remain

Also overhanging the European economic outlook is the threat posed by high inflation.

Annual consumer prices posted a 4-percent gain in July, down slightly down from its preliminary 4.1-percent estimate, Eurostat said.

However, inflation in the euro zone remains at double the ECB's target of "close to, but just below 2 percent."

Comments last week from European Central Bank chief Jean-Claude Trichet that the euro-zone economy faced weak growth in the coming months resulted in the euro suffering its biggest weekly drop, pushing the common currency down to near a six-month low against the US dollar of about $1.50.

Moreover, the slowing growth is likely to help to dampen inflationary pressures in the coming months and mean that interest rates in the euro zone will be on hold for sometime.

In its monthly report released Thursday, the ECB insisted that it remained focused on the threat posed by inflation.

But it warned that "the uncertainty surrounding (the) outlook for economic activity remains high, owing to, among other things, the very high and volatile levels of commodity prices and the ongoing tensions in financial markets.

"Overall, downside risks prevail," the bank's monthly bulletin said.

The ECB left its benchmark refinancing rate on hold at 4.25 percent last week.

Recession looming?

This also follows fears that several euro zone economies which have been hit badly by the global financial market and credit crisis -- such as Spain, Ireland and Italy -- could be already sliding into recession.

Italy's statistics office said last week that the euro zone's third economy shrank by 0.3 percent quarter on quarter, resulting in zero growth on the year. This followed a 0.4-percent slump during the first quarter.

The economy in the 27-member European Union slipped by 0.1 percent during the second quarter to produce a year-on-year expansion rate of 1.7 percent. This compared to a 0.7-percent growth rate during the first three months of the year. The EU clocked up a year-on-year expansion rate of 2.3 percent during the first quarter.