Euro zone economy shrinks despite German growth

The euro zone's debt-ravaged economy shrank in the second quarter, having flatlined in the first, despite continued German growth which economists said could soon be snuffed out.

The 17-nation currency bloc contracted by 0.2 percent on the quarter, data showed on Tuesday. Germany eked out growth of 0.3 percent, marginally beating forecasts, but its forward-looking ZEW sentiment index slid for a fourth month running, undercutting even the lowest estimate in a poll.

Economists said worse is likely to come and even Europe's largest economy is unlikely to defy gravity for long unless decisive action is taken to tackle the bloc's debt crisis.

"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."

Aside from a downward blip in the last three months of 2011, the euro zone has posted pretty consistent, albeit anemic, growth over the past three years although some of its debt-laden members have been in recession for some time.

"It was a touch better than we expected, but I think overall it confirms the idea that the euro zone is in a recession phase," Aline Schuiling, economist at ABN AMRO, said of Tuesday's data.

"What we see is a vicious circle of budget cuts, high interest rates in the periphery and sovereign debt rising," she said. "Policymakers are moving very slowly. There are limited prospects for growth in the euro zone. We expect another contraction in Q3."

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.

"These figures are not excellent, but at the same time France is not in recession while the majority of its European partners are," Finance Minister Pierre Moscovici told Europe 1 radio.

Safe-haven German Bund futures fell and European stocks rose after the slightly stronger than expected German and French GDP reports but the euro dipped against the dollar after the ZEW survey came in worse than expected.

The think tank's monthly poll of economic sentiment slid to -25.5 from -19.6 in July. ZEW economist Christian Dick said the German economy would slow due to weak growth in its main export markets, but would not deteriorate sharply.

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.