Growth in euro area slows as it faces Brexit fallout

LONDON • Euro-area growth slowed in line with economists' forecasts in the second quarter, leaving the currency bloc vulnerable to any fallout from Britain's vote to leave the European Union.

Gross domestic product (GDP) rose 0.3 per cent in the three months through June, the European Union's statistics office said yesterday. That matches an initial estimate and marks a slowdown from an expansion of 0.6 per cent in the first three months of this year.

The German economy grew 0.4 per cent, twice as fast as predicted, while Italy's unexpectedly stagnated. Slower growth strengthens the case for more stimulus. European Central Bank president Mario Draghi has held out the prospect of more easing in case Brexit harms the 19-nation economy and weighs on inflation.

The International Monetary Fund has already scrapped its forecast for a pickup in global growth this year following the referendum.

"A weak number is a foretaste of what comes in the second half of the year," said chief European analyst Holger Sandte at Nordea Markets in Copenhagen, before the report. "Looking forward, growth is more likely to be in the 0.2 per cent to 0.3 per cent area, given the slowdown in Italy and also in France, where manufacturing looks pretty weak. It's too early for Brexit to show up in hard data, but it's definitely a burden."

With an increase of 0.6 per cent, Dutch GDP also beat estimates. France reported last month that growth stalled in the second quarter. Greece's economy unexpectedly grew 0.3 per cent, following a 0.1 per cent contraction at the start of the year.

Diverging economic paths highlight some of the challenges euro- area countries are facing. In addition to terrorism fears in countries like France, bad loans are weighing on Italian banks and political gridlock in Spain is fuelling uncertainty among consumers and companies.

That leaves Germany with an even bigger role to play in ensuring the euro-area recovery remains on track. The European Central Bank is scheduled to set policy on Sept 8. The Bank of England has already cut rates to a record low.

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A version of this article appeared in the print edition of The Straits Times on August 13, 2016, with the headline 'Growth in euro area slows as it faces Brexit fallout'. Print Edition | Subscribe