Data shows euro zone growth stalling, France lagging and deflation a threat

PARIS (AFP) - Europe's fragile recovery is stalling, a batch of economic data showed this week, with analysts warning that France, with the euro zone's second-biggest economy, could be slipping into another downturn.

Even the euro zone's economic powerhouse Germany - whose performance is increasingly divergent from laggard France - is starting to show signs of slowing growth and posted the lowest inflation for four years at 0.9 per cent. This adds to concerns that the spectre of euro zone deflation is coming closer.

Just a month ago, EU Economic Affairs Commissioner Siim Kallas sounded the all-clear for the bloc's economic health, saying that a "recovery has taken hold". With Portugal joining Ireland in exiting a billion-euro bailout programme, and even Greece successfully raising money on the markets, the euro zone was looking to put its debt crisis behind it.

France lags

Analysts have backed this up from the standpoint of monetary policy, saying that decisions by the European Central Bank (ECB) in the last two years to underpin the euro zone debt market have doused the debt crisis. But, almost as quickly, data has emerged suggesting that the fallout from that crisis still weighs heavily on confidence, investment and growth.

The outlook for the French economy suffered several setbacks this week: official data showed a high payments deficit, a leading survey suggested that output is shrinking, and the state statistics agency forecast weaker growth than expected for 2014.

On Friday, the agency said the economy stagnated in the first quarter, and on Thursday official data showed a new rise in unemployment to a record 3.388 million people.

"France risks getting left behind in the euro zone economic recovery," said Christian Schulz, a Berenberg bank analyst. "While the former crisis countries in the south have caught up with the Euro zone average in sentiment indicators, France has fallen behind," he said, referring to a survey on overall eurozone business activity.

The survey found that leading indicators across the zone had slipped from 53.5 points on the index in May to 52.8 points in June, still above the 50-point expansion level, but a setback at a point in the recovery cycle when it should be rising.

Chris Williamson, the chief economist at Markit Economics, which ran the survey, said: "France appears to be entering a renewed downturn after GDP (gross domestic product) stagnated in the first quarter."

That survey showed business activity in France slumping to 48.0 points from 49.3 points, below the 50-point line which marks the difference between expansion and shrinkage of the economy.

On the other side of the scale, heavyweight Germany was still in expansion territory, at 54.2 points.

'Euro zone's main engine sputtering'

But even Germany was starting to flag, as the Ifo economic institute's closely-watched business climate index tumbled to a six month low in June. It was also the third drop in four months.

"The further decline in expectations suggests that businesses have been unimpressed by the ECB's recent actions and bodes ill for actual activity in the coming months," said Capital Economics economist Jennifer McKeown. "These early signs of a slowdown are a disappointing indication that the euro zone's main engine is sputtering long before the region's spare capacity has been eroded.

"This adds to the risk of deflation in the single currency area," she added.

Inflation has been weak across the bloc: as well as hitting a four-year-low in Germany, it is unduly weak in Spain and Italy.

The trend of low inflation had pushed the ECB to roll out an unprecedented package of measures early in June, including negative interest rates, as it sought to head off the spectre of deflation, a potentially crippling downward spiral of falling prices. Analysts warn that the threat of deflation, which can delay investment and household purchases, cut demand and raise unemployment, still lurked.

Bank of America Merrill Lynch analysts see the biggest danger for Spain, Ireland and Portugal, followed by Italy, France and Germany. "Market-based measures of inflation expectations seem to be stabilising at very low levels while firms are not displaying signs of a changed perception of their pricing power," they said.

Tom Rogers, senior economic advisor at EY Euro zone Forecast, also cited deflation as a "significant risk". "Although the ECB remains alert to the threat of deflation, some governing council members' aversion to the use of unconventional measures such as quantitative easing suggests that the ECB will remain loathe to taking more decisive action," he said.

At Capital Economics in London, senior European economist Jennifer McKeown commented that the latest EU business and consumer survey "adds to signs that the euro zone recovery could be nearing a peak when it has hardly begun". This, together with weak inflation, would raise pressure on the ECB which was likely eventually to resort to a "full-blown" programme of quantitative easing, she said, meaning a programme to buy up government debt.