Consumer spending helped limit the damage a slump in business investment inflicted on the eurozone economy in the second quarter but not by enough to stop the growth rate being halved.
Europe's single currency area looked less healthy than many had expected at the end of a period which preceded the recent turmoil in global financial markets, sparked by fears of a sharp US downturn and broader credit crunch.
European statistics office Eurostat confirmed eurozone growth in the April-June period slowed to 0.3 percent from 0.7 in the first three months of the year, and it released new figures which helped identify the main causes.
Corporate investment, the driving force behind a significant upturn in the area's economy last year, shrank 0.2 percent after a 2 percent surge in the first quarter of 2007 - something many economists hope was just a blip.
That was compounded by companies letting their inventories deplete, something that can be read either as a sign of weakness in business conditions or an event that sets the scene for a rebound when firms decide to stock up again.
Japan's economy also disappointed in the same period, with GDP growth of just 0.1 percent quarter-on-quarter, while growth in the US economy was surprisingly strong at around 1 percent quarter-on-quarter despite the troubles of the mortgage and the housing sectors, which some say could yet spark recession.
Mitigating factors in Europe's second-quarter performance were renewed consumer spending growth of 0.5 percent quarter-on-quarter after a flat first quarter and a further positive export performance, Eurostat's data showed.
Many economists argued the slump in corporate investment may have been primarily caused by a hefty drop in the German construction sector after exceptionally high winter levels. The rebound in consumer spending, while welcome, only marked a return to levels preceding the first-quarter stagnation, and some analysts said it was nothing to get overly excited about.
"Consumer confidence could deteriorate in the months to come if the financial turmoil persists," Clemente De Lucia, economist at BNP Paribas bank, said in a note which, like other banks, predicted a third-quarter GDP rebound nonetheless.
"Despite the poor performance of Q2, growth in the eurozone remains solid although in moderation," he said in a note where BNP forecast growth of around 0.5 percent in the third quarter. That is in line with a forecast by the European Commission, that third-quarter growth would be in the range of 0.3-0.8 percent, giving a mid-point of 0.55 percent.
Its forecast for 2007 as a whole, due to be reviewed, is for growth of around 2.6 percent, after 2.7 percent in 2006. European Economic and Monetary Affairs Commissioner Joaquin Almunia said on Monday that the recent turmoil raised the risk of a poorer economic performance than the 2.5 percent forecast for 2008 in the eurozone. As recently as July he was talking about the possibility of upward revisions to GDP forecasts.
BANKING CONFIDENTLY Most economists expect the European Central Bank to hold off on another interest rate rise this week while waiting to see how market turmoil pans out, even if it still sticks to the idea of tightening monetary policy further in the months ahead.
The head of Germany's biggest bank tried to reassure on that front on Tuesday. Deutsche Bank Chief Executive Josef Ackermann gave an upbeat outlook for his bank and the banking sector more generally after weeks of turmoil trigger by a crisis in the US market for subprime, or high risk, mortgage lending. "I am optimistic about the environment globally for financial institutions," Ackermann said.
Germany has had some of Europe's most high-profile victims of the subprime crisis. Two of the country's lenders, IKB and SachsenLB, almost sank when investments linked to that market turned sour, and a several more have detailed billions of euros in exposure to US subprime.
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