Angela Merkel
Adam Berry--Getty Images
By Geoffrey Smith
October 10, 2014

Europe’s stock markets are ending the week in the key of Misery Major, after weak economic data from France, Italy and the U.K. reinforced conditions about growth in the region.

Industrial production was flat in France and rose by only 0.3% in Italy in August, the country’s statistics offices said. Both figures were worse then expected, and led many to conclude that the Eurozone’s second- and third-largest economies had both probably shrunk in the third quarter.

Market sentiment has been battered this week by downgraded growth forecasts from international bodies such as the International Monetary Fund and the Organization for Economic Cooperation and Development, both of which have raised the specter of a third recession in five years for the Eurozone.

But the wave of capitulation seen this week has happened largely because of developments in Germany, five leading research institutes in a joint report slashed their growth forecasts for this year and next year (to 1.3% and 1.2% respectively)–and took the rare step of blaming German economic policy largely for the problem.

That slowdown was shown starkly in the week’s data, with incoming orders to manufacturers, industrial output and exports all falling at their fastest rate in five years. However, the figures drastically overstate an underlying trend of “modest deterioration”, according to economists at Berenberg Bank in London.

“The late start to summer school holidays led to factory closures falling entirely in August rather than at least partly in July, as is usual,” Berenberg’s Christian Schulz said in a note to clients Friday. “Taking July and August together, industrial orders and output were each down 0.3% on the Q2 average, while exports (+2.0%) and retail sales (+0.8%) actually increased.”

While Germany has been the Eurozone’s growth engine for the last five years, it’s the U.K. that is Europe’s fastest-growing economy this year, but even there the signs of slowdown are becoming more evident. Data released Friday showed U.K. businesses struggling to export to a slowing Eurozone, while stocks were also hit by a rise in political uncertainty after big gains for the protest party UKIP in two by-elections to parliament Thursday.

The German benchmark DAX index fell 1.8% by lunchtime in Europe, and has now erased all of its gains for the year after posting an all-time high only three months ago. The U.K.’s FTSE-100 index fell 1.0% to its lowest level in 15 months.

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