August 13, 2012 / 11:03 PM / 6 years ago

Euro zone output expected to shrink in second-quarter

BRUSSELS (Reuters) - Euro zone output is seen declining in the second quarter when the European Union releases data on Tuesday, as the debt crisis hurts confidence, making businesses reluctant to invest and consumers worried about spending.

Gross domestic product (GDP) in the zone likely shrank 0.2 percent from the first quarter of the year, according to an average of estimates of 55 economists polled by Reuters. The most pessimistic forecast a contraction of 0.7 percent.

The downturn comes amid political events that have further rattled the continent. In June, the success of anti-bailout parties in the run up to a Greek vote raised the specter of it leaving the euro zone. Spain rescued the struggling lender Bankia (BKIA.MC), increasing worries over the euro zone’s fourth-largest economy.

“That really shattered consumer and business confidence,” said Martin van Vliet, an economist at ING.

The euro zone’s output stabilized in the first quarter, but a decline in the second quarter would put the region on course for a recession if output in the current, third, quarter also shrinks.

“We think that the stabilization in the first quarter was just a temporary stabilization and that the underlying story is just one of ongoing recession,” said Aline Schuiling, and economist at ABN AMRO. “All the data are in line with a mild recession.”

As well as an estimate for the euro zone as a whole from the European Commission’s statistics office, national GDP data are also expected on Tuesday from France, Germany, Portugal and the Netherlands.

In Belgium, the first main economy in the zone to report, GDP shrank 0.6 percent, the central bank said at the start of August. That was more than double the worst estimate of economists polled by Reuters beforehand.

Only Germany, the euro zone’s largest economy, is expected to grow, with 46 economists polled expecting on average a 0.2 percent rise in output.

Germany has benefited from growing exports to Asia and falling unemployment, providing a good export market for struggling euro zone countries like Spain, however that will not be enough to make them grow.

“That has a positive effect on Spain, but Spanish exports are only about 30 percent of GDP so the rate is too small to offset the contractionary effect of domestic spending which is really plummeting,” said van Vliet.

EU leaders have been struggling to find ways to fix the nearly three-year-old debt crisis, which now threatens Italy and Spain, as well as Greece.

At the end of June they empowered their rescue fund to inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states. [ID:nL6E8HT9ZS] They also pledged to create a single banking supervisor for euro zone banks based around the European Central Bank - a first step towards a European banking union that could help shore up Spain.

In addition, ECB President Mario Draghi agreed earlier in August to intervene in bond markets if countries first apply for aid from the European bailout funds.

However, investors are still demanding interest rates close to 7 percent to hold Spanish 10-year bonds, a level at which other countries have had to consider seeking a bailout. And the bloc’s politicians still have to figure what to do if Spain or Italy were to topple.

“As long as the euro crisis is not really resolved, we can all debate about GDP, but we need this crisis to be resolved before we can start to talk about sustainable recovery,” said ING’s van Vliet.

Reporting By Ben Deighton. Editing By Sebastian Moffett, Ron Askew.

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