Falling exports and lower household spending caused the euro economy to shrink by 0.2 percent in the second quarter, EU statistics showed Wednesday. High fuel and food prices have held consumers back from making more purchases, hitting one of the main drivers of economic growth as a strong euro, a slower world economy and increased transport costs brake exports to other nations. Worse may lie ahead for the third quarter - despite some relief as oil prices fall back from record highs - as euro-zone business and consumer confidence tumbled over the summer. The EU statistical agency Eurostat confirmed an earlier estimate for the three months ending June 30, saying the 15 nations that share the euro saw growth decline 0.2 percent from the previous quarter. It revised downward its figure for yearly growth to 1.4 percent from 1.5 percent. Giving more details for the reasons behind slipping growth, it showed that exports were down 0.4 percent and investment down 1.2 percent - both coming down from strong first quarters. But the fall in household spending is more serious. It was down 0.2 percent from the first three months of the year, when it did not grow at all. UniCredit economist Aurelio Maccario said the figures show the start of “a phase of prolonged weakness bound to last a few quarters.” Although the euro zone should escape an official recession, the economy is not likely to grow more than 1 percent next year, he said - making it likely that the European Central Bank's next move would be to cut borrowing costs to boost growth. Eurostat made no changes to quarterly figures showing Germany, France and Italy braking sharply, which have raised recession fears. Germany, the EU's largest economy, contracted by 0.5 percent in the three months ending June 30, dropping for the first time in nearly four years. This came after a bumper first quarter. The world's biggest exporter had so far weathered the economic storm brewing in Europe despite high inflation hitting spending at home and foreign sales being hurt by a slowing world economy and the strong euro. France and Italy both declined 0.3 percent from the previous quarter. The two sluggish economies failed to lift with the recent rising tide that saw Europe speed ahead in the last two years after a long period of stagnant growth. The Netherlands, another major euro-zone exporter, saw quarterly growth freeze - as did non-euro nations Britain and Sweden. No euro country is yet officially in recession - the commonly accepted definition is two consecutive quarters of negative growth - although Ireland may be when it publishes a second-quarter figure. The once-booming Celtic tiger economy contracted in the first three months of the year. High inflation is currently the euro economy's biggest problem as it reduces household spending -the main engine of growth - and hikes costs for companies and exporters. Workers, facing higher prices at the gas pump and grocery store, are demanding more pay in the face of European Central Bank concerns that this would fuel an inflation spiral. Sagging growth complicates the ECB's efforts to fight inflation, which is well above the bank's recommended guideline of just under 2 percent. Inflation was at 3.8 percent in August, according to a Eurostat estimate. The ECB in June hiked interest rates from 4 percent to 4.25 percent to try to cool inflation _ even though this risks slowing growth by increasing the cost of borrowing money in a tight credit market still suffering from the subprime banking crisis. The ECB is expected to keep rates on hold when it meets again on Thursday. Bank President Jean-Claude Trichet pointed to weak growth after the bank's August meeting, suggesting further increases were less likely until inflation calms down next year.
