A darkening outlook for European stocks

The hope in Europe that the current financial turmoil could be confined to the UK and US took a blow as the eurozone's second-quarter growth figures showed a 0.2% contraction in the second quarter, the first negative figure since the euro's inception in 1999.

Since the credit crisis began, many investors have hoped that "the worst of the economic and financial trauma" could remain "largely confined to the Anglo-Saxon world", says Gary Duncan in The Times. That illusion was finally shattered last week as the eurozone's second-quarter growth figures showed a 0.2% contraction in the second quarter, the first negative figure since the euro's inception in 1999. And with the malaise set to worsen, the eurozone is on track to become the first major economy in the developed world to post two successive quarters of negative growth and thus fall into recession.

High raw materials prices, the effect of past interest-rate hikes, a high euro and the credit squeeze have taken their toll, and there is scant prospect of improvement. Key indicators such as business confidence in the three biggest economies Italy, Germany and France have turned down sharply. GDP has fallen in all three and there are "worrying signs that the export motor that drives the German economy is sputtering", says The Economist. Foreign orders for German engineering goods slid by an annual 7% in June.

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