Slowing Germany drags down Europe’s economy as U.S. tops expectations

Preliminary figures for how Canada's economy fared in the second quarter of the year are due out on Wednesday.

Europe’s economy saw modest growth in the April-June quarter even as the U.S. outperformed expectations, highlighting a persistent transatlantic growth gap. Germany, the leading European economy, remained in the dumps while hesitant consumers saved more rather than spending on new houses or cars.

Preliminary figures for how Canada’s economy fared in the second quarter of the year are due out on Wednesday.

Gross domestic product, the total output of goods and services, rose 0.3% in the second quarter in the 20 countries that use the euro currency, according to official figures released Tuesday by European Union statistics agency Eurostat. Germany slid back into contraction, recording a 0.1% fall in output.

Tuesday’s figures follow a similar 0.3% performance from the Jan.-March quarter, the first significant growth after more than a year of stagnation just above, at, or below zero.

By contrast, the U.S. economy grew 0.7% in the second quarter from the first quarter, or 2.8% on an annualized basis. U.S. consumers are spending freely, while support from larger budget deficits and subsidies for business investment, for instance in renewable energy under the Inflation Reduction Act and in semi-conductor production and infrastructure, are also contributing to U.S. growth.

Those two trends are reversed in Europe, where consumers are saving at record levels and governments have started restricting spending to reduce budget deficits.

“The outperformance of the U.S. is largely due to strong private consumption and domestic investment,” said Thomas Obst, senior economist at the German Economic Institute in Cologne. “Fiscal policy support was higher in the U.S. than in other advanced economies, overall spending 25% of GDP.” Meanwhile, higher interest rates have had less impact on lending and the economy than in Europe, he said.

The middling growth figure from the first half of this year follows five straight quarters of essentially zero growth caused by an outburst of inflation that robbed consumers of purchasing power. Energy prices soared after Russia cut off most supplies of natural gas in 2022 over the invasion of Ukraine, and as the global economy rebounded from the pandemic, straining supplies of parts and raw materials.