Germany's faltering economy has cast further doubt over the eurozone's prospects for recovery this year, with no other big country strong enough to pick up the slack. Since late last year, the 18 countries using the euro have been climbing steadily out of a two-year recession. But just as the bloc appeared to be turning the corner, its star economy, Germany, has fumbled the ball.
To make matters worse, other big states, including the euro zone's second-largest economy France, show little prospect of a strong rebound. French industrial production plunged unexpectedly in May, and inflation fell to its lowest level since the financial crisis in 2009. Adding to the gloom, Italy's factories also saw a 1.2 percent drop in output in May, the steepest fall in more than a year and a half.
And while Spain is expecting growth to accelerate to near 2 percent in 2015, one in four of Spain's workforce are out of work after the collapse of a property price bubble. "Europe is getting more and more Japanese," said Carsten Brzeski, an economist with ING, echoing concerns of others that the region faces permanent slow growth and no price inflation.
"The euro zone is flat lining. I don't see substantial growth for another year." At the start of 2014, the picture looked different. Throughout the first three months, the German economy grew at its strongest rate in three years - 0.8 percent - thanks in part to mild weather lifting construction work. That made up for stagnation or slowdown in France, Italy and the Netherlands and prevented the bloc's overall recovery from stalling.
While Britain, outside the bloc, underlined its robust recovery with the strongest quarterly growth in four years - to end June - the mood is turning in continental Europe's industrial powerhouse. German exports, imports, industrial orders, output and retail sales all fell in May compared with a month earlier. On Thursday, Germany's economy ministry cautioned about the impact of the crisis in Ukraine on confidence in Germany as it painted a bleak picture of the second quarter. "After a growth-strong start to the year, the development of the German economy in the second quarter is subdued," the report said.
Across the whole euro zone, analysts expect growth in the second quarter at around 0.2 percent, quarter on quarter, as seen in the three months to March. In the boardrooms of Germany's Mittelstand, the small and medium-sized companies that employ about 70 percent of its workforce, the sense of nervousness is palpable. "The mood has deteriorated after the strong start to the year," Mario Ohoven, head of the BVMW Mittelstand association, told Reuters. He blamed the 'smouldering' euro zone crisis and Ukraine for crimping companies' export forecasts.
In neighbouring France, the government has struggled to reform its social welfare system and labour model. President Francois Hollande is pinning his recovery hopes on plans for nearly 40 billion euros in corporate tax breaks to be phased in over the coming three years. But the announcement has done little so far to lift business confidence, which has ebbed ever lower in France. The country's central bank estimates growth of only 0.2 percent in the second quarter after stalling in the first three months.
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