THE EURO zone economy recorded its first ever contraction in the second quarter, pulled down by falling activity in its biggest economies and raising the risk of a recession.

The European Union’s statistics office Eurostat yesterday estimated that the economy of the 15 countries sharing the euro contracted 0.2 per cent against the first quarter and grew 1.5 per cent year on year. Both numbers were as expected.

Eurostat said that the quarterly decline was the first since its data series for the euro zone started in 1995.

“There is a good chance that the economy is already in recession, but even if it isn’t, the outlook remains for subdued growth in the quarters to come,” said Stuart Bennett, senior strategist at Calyon.

Leading economies in the bloc yesterday reported a slowdown in activity, with the German economy contracting by 0.5 per cent in the second three months of the year, according to data released yesterday.

The second largest euro zone economy, France, saw growth slip from 0.5 per cent in the first quarter to 0.2 per cent in the last three months.

The first dip in four years in the German economy, still seen as the Continent’s motor, was less severe than predicted and observers remained optimistic that the year would end with an overall plus.

“The German economy has got to get through a rough patch for growth in the coming months.

“But overall, there’s no reason for excessive pessimism based on the development of the first half of the year,” said the Bundesbank in a statement.

A government spokeswoman confirmed that “the upswing is over”, but added that “there’s no sign of a severe recession”.

Their cautious optimism of staving off recession stems from dropping oil prices, a weaker euro and unemployment at 3.25 million, the lowest level in 16 years.

The weaker euro will give a boost to Germany’s important manufacturing sector: the prospect of more affordable exports may set off or even reverse recent trends in the sector.

“It’s not that orders have completely collapsed, it’s just that we see a serious slowdown in new orders,” said Gernot Nerb, chief economist at Munich’s Ifo economic institute, to Bloomberg yesterday.

Mr Nerb predicted overall German growth of “at least two per cent” this year.

Driving the German slowdown is the recurring problem of weak consumer spending.

There is no sign as yet of that changing, with the news yesterday that inflation in Germany remained at a 15-year high of 3.3 per cent, year on year.

Data from Italy last week showed shrinkage of 0.3 per cent quarter on quarter last week.

Spain has recorded slight growth of 0.1 per cent in the second quarter, a result greeted with scepticism by some analysts considering the country’s ongoing property crisis.

Portugal and Austria each posted 0.4 per cent quarter on quarter growth.

Outside the euro zone, Estonia joined Denmark in recession. – (Additional reporting, Reuters)