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Eurozone economy slows in Q2 as investment drops

The eurozone economy slowed in the Q2 of this year mainly due to declining investment and sharp drop in the construction sector, the European Union’s statistics bureau Eurostat said on Tuesday.

Economic growth in the 13 nations that share the same currency narrowed to 0.3% in Q2 after a quarterly increase of 0.7% in the first three months. It was the slowest pace in a year. Compared to a year ago, eurozone economy grew by 2.5% in Q2, down from 3.2% in the previous quarter. The figures were in line with Eurostat and economists’ estimates. Analysts said the economic slowdown was mainly due to declining investment and a sharp drop in the construction sector.

Investment decreased 0.2% in Q2 after expanding 2% in Q1 while construction activity in the construction sector shrank by 1.6% after increasing 1.9%. Meanwhile, domestic demand became the main driver of economic growth, with household consumption up 0.5% after a standstill in the first three months. Despite the appreciation of euro, the eurozone recorded strong exports in the Q2, which increased to 1.1%, up from 0.8% in Q1.

GDP growth dropped more sharply than expected in Germany and France, the two largest economies in the euro zone, with both slowing from 0.5% to 0.3%. In Germany, exports remained strong but investment in the construction sector fell, while economic slowdown in France was mainly due to unsound business investment and increasing trade deficit.

Economists said the economic slowdown may persuade the European Central Bank to keep the eurozone benchmark interest rate intact this week, while others expected the eurozone economy to gather strength in H2 of this year.

The European Commission estimated the eurozone economic growth in Q3 would be among the range of 0.3-0.8%, 0.2-0.8% in Q4, and 0.2-0.9% for Q1 2008.

In the 27-nation EU, GDP growth also slowed to 0.5% in Q2 from 0.7% in Q1.  By comparison, US economy quickened its pace in Q2, increasing by 1.0% quarter on quarter after a 0.2% increase in Q1. In Japan, the economic growth rate was 0.1% in Q2 of 2007, after a 0.8% increase in Q1. (