Germany grows

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Germany posted modest economic growth in the second quarter of the year and France stagnated, suggesting the euro zone as a whole contracted over the three months, a downturn that its largest economy is unlikely to be able to defy for long.

Germany eked out growth of 0.3 percent over the quarter, marginally beating forecasts, but economists said it could soon succumb unless decisive action is taken to tackle the currency bloc's debt crisis.

More up-to-date evidence from the third quarter has shown declines in German manufacturing orders, industrial output, imports and exports. Germany's forward-looking ZEW sentiment index will be published later in the day.

“Growth turned out to be pretty solid. But this could be the last positive piece of news out of Germany for some time,” said Joerg Kraemer at Commerzbank. “The German economy could contract in the summer. It is fundamentally in good structural shape, but can't decouple from the recession in the euro zone, plus the global economy has also shifted down a gear.”

For France, it was the third consecutive quarter of zero growth. The central bank has already said it expects a mild contraction in the third quarter.

The euro zone is forecast to have contracted by 0.2 percent in the second quarter, having flatlined in the first. That figure will be published at 11:00 SA time. Economists say worse is probably to come.

“Despite the positive growth number for Germany, we expect total euro zone GDP to have contracted by around 0.4 percent on the quarter in the second quarter, as severe fiscal austerity is pulling most economies into recession,” said Aline Schuiling, senior economist at ABN AMRO.

Safe-haven German Bund futures fell and European stocks rose after the slightly stronger than expected German and French GDP reports eased concerns about the euro zone's two biggest economies.

Austria and the Netherlands almost matched Germany's performance, each posting growth of 0.2 percent. Economists surveyed by Reuters had expected the Dutch economy to shrink 0.3 percent.

Finland, one of Germany's northern European allies in pushing for austerity, suffered a 0.7 percent year-on-year fall in GDP.

SOUTHERN PAIN

For the currency bloc's members at the sharp end of its debt crisis, the picture is bleaker still and as economies shrink, so do tax revenues, making deficit-cutting even harder to achieve.

That has fostered a growing debate inside and outside Europe about the sense of austerity drives.

Figures released on Monday showed deficit-cutting measures helped to shrink Greece's economy 6.2 percent year-on-year in the second quarter. Economists say the slump will persist as the government scrambles to secure billions in additional cuts to keep bailout funds flowing.

Italy's second quarter data was released last week and showed the economy contracted 0.7 percent quarter-on-quarter, compounding the difficulties for Mario Monti's technocrat government as it tries to avoid a bailout.

Spain's economy shrank 0.4 percent over the same period, pushing it deeper into recession, according to figures out two weeks ago.

The big unanswered question is whether a weakening economy will make Germans less likely to support government rescue efforts for the broader euro zone.

German Chancellor Angela Merkel has said repeatedly over the past year that she will do everything to save the euro, most recently after the European Central Bank signalled it would intervene in the bond market to lower Spanish and Italian borrowing costs.

Not all Germans support that course and the chancellor's room for manoeuvre appears to be shrinking at a time when both Greece and Spain may soon require new rescues. However, if ordinary Germans start to feel real economic pain, their response could be to demand their leaders sort out the crisis that is now finally knocking at their door.

Spanish and Italian bond yields have steadied since ECB President Mario Draghi promised to do whatever it takes to save the euro zone. It is quite possible that Madrid and Rome will seek help from the euro zone's rescue funds and the ECB before the year is out.

“It remains decisive whether the euro crisis can be controlled. We expect that the ECB has initiated a turning point with its signal of bond purchases,” said Christian Schulz, economist at Berenberg Bank. “After a weaker summer the German economy will be able to grow faster again from the fourth quarter.” - Reuters