Europe’s growth lags US again, as Germany remains the eurozone’s economic problem child

FRANKFURT, Germany — Europe’s economy enjoyed modest growth in the April-June quarter even as the U.S. outperformed expectations, highlighting a persistent transatlantic growth gap with Germany, the leading European economy, remaining in the dumps and as hesitant consumers save more, rather than spend on new houses or cars.

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, the largest eurozone economy, 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 government spending from larger budget deficits and subsidies for business investment, 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 lukewarm 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.

Those headwinds have eased, but Europe faces lingering effects as new labor agreements restore real wages with a lag and government support payments and tax breaks, aimed at easing, the energy crisis are phased out. Governments have shifted to trimming deficits that swelled during the energy crunch.

Higher interest rates from the European Central Bank have helped bring inflation down from 10.6% in October 2022 to 2.5% in June — but have also held back construction activity and quashed a years-long rally in house prices. New car sales were up 4.3% in the first half of the year from the same period last year but remain some 18% below pre-pandemic levels.

Another factor is the European consumers’ unusually high level of precautionary savings, which reached 15.4% in the first three months of the year, a record high excluding the pandemic years. Reasons for setting aside more money could be the chance to earn higher interest rates by saving, feeling poorer due to lower house prices, and fears about the future, despite low unemployment of 6.4%

The high savings rate and consumer surveys indicate that “intentions to make major purchases are extremely low,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.