BRUSSELS, Aug 14 (AP): Eurozone growth braked sharply in the second quarter as major economies Germany, France and Italy shrank, EU statistics showed Thursday, with high fuel and food prices holding back consumer spending.
Growth in the 15 economies that share the euro currency contracted by 0.2 per cent from the first quarter, expanding just 1.5 per cent from the same period a year ago, the EU statistical agency Eurostat said in a first estimate that it may change at a later date.
Germany, the region's largest economy, shrank 0.5 per cent in April-June from the previous quarter with France and Italy both down 0.3 per cent.
German growth dropped for the first time in nearly four years. The world's biggest exporter had so far weathered the economic storm brewing in Europe despite high inflation hitting spending at home and a slowing world economy and a strong euro hurting exports to the US.
No euro nation is yet officially in recession by showing two consecutive quarters of negative growth. Eurostat did not give a figure for Ireland, once a booming Celtic tiger economy, which contracted in the first quarter.
But worse seems yet to come. Business and consumer confidence in the euro area plunged to the lowest level in more than five years in July. The euro jobless rate also started to climb in April from an all-time low it reached in December.
Separately, Eurostat said that July inflation was still high but better than anticipated, posting a figure of 4 per cent - the same as June - that it revised downward from a record high of 4.1 per cent.
The rate was driven by higher prices for package holidays, housing services and transport fuel, it said.
High inflation is the euro economy's biggest problem as it eats into household spending - the main engine of growth - and hikes costs for companies and exporters.
Workers, facing higher prices at the gas pump and grocery store, are demanding more pay in the face of European Central Bank (ECB) concerns that this would fuel an inflation spiral.
The ECB has reason to worry. Stripping out soaring fuel and food prices, underlying inflation is running worryingly high at 2.6 per cent - above the ECB's recommended guideline of just under 2 per cent.
The bank in June hiked interest rates from 4 per cent to 4.25 per cent to try to cool inflation even though this risks slowing growth by increasing the cost of borrowing money in a tight credit market still suffering from the subprime banking crisis.
The 27-nation European Union also saw growth fall by 0.1 per cent from the previous quarter, up just 1.7 per cent from a year ago.
Only one EU country is now in recession: the fast-growing Baltic economy of Estonia. Growth was minus 0.9 per cent in the second quarter and down 0.5 per cent in the first.
Denmark also risks recession. Eurostat has no second quarter figure but the country posted growth of minus 0.6 per cent in the first quarter.
Meanwhile, the French economy contracted by 0.3 per cent in the second quarter of 2008, the statistics institute INSEE said today, signalling the first setback for nearly six years.
INSEE said the contraction in the second quarter, in contrast to its expectations that the economy would grow, was the first since the fourth quarter of 2002.
Until now, INSEE had forecast that the economy would grow in the second quarter, by 0.2 per cent.
The data was a first estimate, subject to revision, and INSEE revised downwards its previous estimate for growth in the first quarter to 0.4 per cent from 0.5 per cent.
France has the second-biggest economy in the Eurozone, after Germany which earlier had announced that its economy had contracted by 0.5 per cent in the second quarter.
Last week the president of the European Central Bank, Jean-Claude Trichet, warned of signs that the Eurozone economy was slowing down, and his remarks helped push the euro down sharply against the dollar.
