Europe Recovers as U.S. Lags

Germany, France Escape Recession Even as Consumer Weakness Hobbles America By MARCUS WALKER in Berlin and DAVID GAUTHIER-VILLARS in Paris Germany and France have escaped from recession surprisingly quickly, outpacing the U.S. in returning to growth thanks in part to government stimulus efforts and consumer spending. Germany, Europe's biggest economy, grew at an annualized pace of 1.3% in the second quarter, while France, the region's second-biggest economy, expanded at an annualized rate of 1.4%. Both countries recorded contractions for the previous four quarters, and bounced back earlier than other advanced economies including the U.S. and the U.K. The news that Europe's economic engine is rebounding suggests the region is joining the recovery under way in China and increasingly elsewhere in Asia, exemplified by India's announcement Wednesday that industrial production in June rose nearly 8% from a year earlier. That contrasts with uneven consumer spending in the U.S., where retail sales unexpectedly fell 0.1% in July, as American households are hurting from job losses, a weak housing market and tight credit. This week, Federal Reserve officials said U.S. "economic activity is leveling out," but cautioned that it is likely to remain "weak for a time." While previous global rebounds relied heavily on U.S. shoppers, the current recovering trends in Asia and Europe appear to hinge more on spending by governments and the region's households and businesses. That could benefit the U.S. economy in coming months by lifting American companies' exports while U.S. consumers rebuild their battered finances. "We're used to the U.S. leading the way to recovery, but this time we're having to look eastwards to Asia and to a homegrown recovery in Europe," said Julian Callow, chief European economist at Barclays Capital in London. However, the rebound will probably turn global in the current quarter, he says, noting "just as it was a synchronized recession, it will largely be a synchronized upturn." While U.S. consumer spending is expected to remain crucial to the world economy, its relative importance appears to have diminished in sparking the early stages of global recovery. Economists React: Signals of Recession End Growth May Prompt a Rethink at ECB Eastern Europe Sees Hope for Exports Although U.S. gross domestic product was still falling last quarter, there have been signs of improvement, including indications that housing prices are stabilizing and a report last week that the jobless rate fell to 9.4% in July, the first decline in more than a year. The return to modest growth in Germany and France meant that GDP in the 16-nation euro currency zone fell at an annualized rate of 0.4% in the second quarter -- a big improvement on the euro zone's 9.7% pace of contraction in the first quarter. Doubts persist about sustaining the recovery in Europe's economic heartland next year. Stimulus measures, including programs to scrap old cars for more fuel-efficient ones will expire, while European banks continue to pare lending as they try to digest losses from the financial crisis and rebuild capital. Unemployment is still rising because continental Europe's strictly regulated labor markets trail the business cycle. Layoffs in France, for example, can involve lengthy legal proceedings. The strong euro, which rose to $1.42 Thursday, could hinder a recovery in exports. Some economists say a spreading swine-flu epidemic this fall might cripple business. That makes some economists fear a W-shaped recovery, with a risk of stagnation ahead before growth becomes more robust. Even in France and Germany, business activity is picking up at a very depressed level, making the tentative upturn feel like a recession to many. On Aug. 5, steel giant ArcelorMittal SA said it was restarting its blast furnace in Florange in eastern France after a four-month stop caused by a dearth of demand. The European Central Bank has so far sounded cautious about the euro-zone outlook for 2009, predicting a return to sustained growth only in 2010. Some economists say they now believe the ECB is behind the curve. Many indicators and business surveys imply further strengthening in the near term, such as the purchasing-managers index for euro-zone manufacturing, which rose to an 11-month high in July. "The picture for the third quarter is quite encouraging," says Davide Stroppa, chief economist at Italian bank UniCredit in Milan. Weak banking lending is the "big 'if'" for Europe, he said, adding, "On the other hand, most Europeans don't need to rebuild their personal savings, something that will put a cap on consumer spending in the U.S." At German family-owned firm Walter Kottmann GmbH, which makes tools for the construction and home-improvement sectors, new orders started to rise again in June and July, after falling nearly 40% in the year to May. The pickup is noticeable in northern Europe, but not in southern Europe, says owner and Chief Executive Stefan Kirschsieper. The strong euro isn't helping Mr. Kirschsieper's U.S. sales to recover. Overall, his order book is 30% emptier than a year ago. German government subsidies for workers whose hours have been cut prevented hundreds of thousands of job losses this year, say analysts and business groups. Some fear the policy has merely delayed layoffs until the winter. But many of the family-owned firms that dominate Germany's economy are hoping to avoid layoffs altogether. In France, a snapshot of the packaging industry, which is seen as a good yardstick of the broader economic environment, suggests some sectors are emerging from recession while others remain depressed. Demand for paper-based packaging from agro-food industries was up 11% in the first six months of 2009 from a year earlier, says Stéphane Teicher, a director at CLIFE, France's federation of packaging makers. Demand from building-material firms was down 20% over the period, he said. Some euro-zone members are on a slower path to recovery. Italy's GDP shrank at an annualized 1.9% in the second quarter, according to data published Wednesday, while Spanish data due for release Friday are expected to show an annualized contraction of nearly 3.6% last quarter. The U.K., Europe's third-biggest economy and the largest outside the euro zone, was still contracting in the second quarter: GDP fell at an annualized rate of 3.2% as tight bank lending hit consumer spending and business investment. Europe's "cash for clunkers" incentives are playing a big role in supporting industry and consumer spending. The success of Germany's €2,500 ($3,540) subsidy for trading in a clunker has led to its emulation by other countries. But Germany has said it won't extend its program into 2010, which means new-car sales are likely to fall again. France is expected to extend its "cash for clunkers" program beyond this year, for fear its sudden end could nip growth in the bud. "We are considering ways to phase out the program gradually," a French Finance Ministry official said. Write to Marcus Walker at marcus.walker@wsj.com and David Gauthier-Villars at David.Gauthier-Villars@wsj.com