Eurozone rebound gets another nasty German surprise
By Alister Bull, European Economics Correspondent
FRANKFURT, Aug 19 (Reuters) - Fears for the euro zone's recovery mounted on Monday after the German central bank warned that the region's largest economy was still stuck in first gear.
A monthly Bundesbank report followed news from Italy and the Netherlands that had already highlighted the fragile state of the upturn, backing views the European Central Bank may need to go on the offensive and cut interest rates again this year.
"There is no doubt that the second quarter has been consistently surprising on the downside," said Julian Callow, chief euro zone economist at CSFB in London.
"Don't forget that the U.S. also came in weaker than expected, so this trend is not being confined to the euro zone. But we might have hoped for better consumption data and less of a drag from inventories," he said.
Other news on Monday that euro zone consumer prices remained under the ECB's two percent tolerance threshold, rising by just 1.9 percent in July, added to the sense that the central bank may have to ease rates again in the coming months.
The ECB's next policy meeting is on September 12. It has already shifted its policy bias into neutral and may face pressure to follow the Federal Reserve to a clearer easing bias at the Group of Seven meeting in Washington on September 28.
FORECASTS CUT
Revisions to U.S. growth and a much weaker than expected performance of 1.1 percent annualised in its second quarter had raised the alarm on both sides of the Atlantic.
Forecasters for the common currency bloc began cutting after they saw a dip in leading economic indicators and the feeble contribution from Italy, where the economy advanced 0.2 percent, and Dutch growth of just 0.1 percentage point.
Germany was expected to join them as euro zone laggards and the Bundesbank confirmed this fear, estimating growth of just a quarter percentage point in the second quarter after 0.2 percent in the first three months of the year.
This means that Germany has been at a virtual standstill for five consecutive quarters, including a shallow recession in the second half of last year, and was still in the danger zone.
"As long as the economy has not yet gained strength or dynamism, it remains vulnerable to new shocks, be they external or home-made," the Bundesbank said.
The country's BDB banking association also chipped in, warning that it had halved its forecast for national growth this year to 0.5 percent, although it dismissed talk of a double-dip recession -- as view that the Bundesbank said it shared.
"We had expected a flat first half. We still expect a pick- up in the next six months but must now see some acceleration (in growth)," said Gernot Nerb, a senior economist at the Ifo Institute in Munich.
Reuters' August poll showed consensus estimates for growth in the 12 nation bloc have fallen to one percent this year, from 1.4 percent in the May survey, with 2.5 percent now predicted in 2003 from an earlier 2.8 percent performance.
IFO WARNING
Sentiment has been led lower by a clear deterioration in leading indicators, which are designed to predict turns in the business cycle six months or so down the road.
The most closely watched of these is Ifo's barometer of German business confidence, which fell unexpectedly in July as the future expectations component of the index shrank from a bloodbath in world stock markets.
This month's report goes out on August 28 and a sharp decline in another German index, from the ZEW think tank, was taken as a warning that Ifo may head lower once again, although Nerb said that there was no strict correlation between the two.
But the lack of visible independent strength in the German economy was a red alert for the whole region, with the rise in the euro against the dollar impeding exports, the one part of the economy which had been picking up according to plan.
"Confidence indicators rose strongly at the start of the year but a lot of that was due to optimism in the U.S. Take that away and it is hard to see where momentum is coming from," said Darren Williams and equity economist at Citibank in London.
"The ECB might give a marginal boost through monetary policy. But help from fiscal policy is ruled out by the Stability and Growth Pact and the stronger euro threatens an export-led recovery," he said.
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