ROME, Aug 12 — The euro-area economy probably edged back to growth last quarter for the first time since 2011, ending the longest recession since the single currency union started 14 years ago.

Gross domestic product in the 17-nation region expanded 0.2 per cent in the three months through June after shrinking for the previous six quarters, according to the median of 21 economist forecasts in a Bloomberg News survey. The European Union’s statistics office in Luxembourg will release the data at 11am on August 14.

The German economy probably expanded about 0.75 per cent, exceeding the 0.6 per cent economists predict, according to a government estimate.

A year of relative calm on financial markets, budget cuts and economic reforms from Spain to Italy, and accelerating growth in the US, the world’s biggest economy, has helped the euro area start to recover from a downturn that pushed unemployment to a record 12.1 per cent. At the same time, European Central Bank President

Mario Draghi has described progress as “tentative” and said further growth may depend on repairing banks’ balance-sheets to spur lending.

“The external environment is really getting better, led by signs that US demand is picking up,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The second quarter should mark the end of the recession in the euro area, but the recovery will be excruciatingly slow. We’re not getting the champagne out yet.”

Slowing contractions

Economic data has confirmed the picture of a gradually improving economy, even in countries that have suffered the worst of a European sovereign debt crisis that is now in its fourth year. Against that backdrop, the ECB has cut interest rates to their lowest-ever level and Draghi has pledged they’ll stay there or lower for an “extended period.”

Spain’s economy shrank just 0.1 per cent in the second quarter from the prior three months and unemployment fell from the highest levels in the country’s democratic history. Prime Minister Mariano Rajoy’s strategy of making it easier for companies to hire, fire and negotiate contract terms with employees helped the country generate a current account surplus of €2.4 billion (RM10.4 billion) in May, compared with a deficit of €625 million a year earlier.

In Italy, where Prime Minister Enrico Letta is easing last year’s budget austerity, GDP contracted a less-than-forecast 0.2 per cent from the first quarter.

German growth

Adecco SA, the world’s largest provider of temporary workers, reported increased profit for the second-quarter, and the Glattbrugg, Switzerland-based company said it sees more positive signs for business as Europe’s labor markets stabilise.

Economic confidence in the euro area, as measured by the European Commission, increased for a third month in July. Manufacturing expanded for the first time in two years, according to a purchasing-managers survey by London-based Markit Economics.

“Now we start seeing possibly the first signs that this significant improvement in confidence and interest rates is finding its way through to the economy,” Draghi said on August 1.

As the pain in Europe’s periphery has eased, German growth has strengthened. The Economy Ministry is predicting growth of about three quarters of a per cent, according to a person familiar with the forecast, who asked not to be identified because the projection is confidential. The ministry said on August 9 that the region’s biggest economy expanded “markedly” in the second quarter, driven by private consumption and industrial production.

The Federal Statistics Office will release second-quarter GDP data ahead of the euro-area number on August 14.

Financial markets

Chancellor Angela Merkel will seek a third term as German leader on September 22 on the strength of shielding her country from the worst effects of the euro area’s debt crisis. The nation’s AAA credit rating was affirmed last week by Fitch Ratings, which said Merkel’s government had beaten its own budget targets and positioned Europe’s largest economy on the path to growth.

Likewise, financial markets have largely avoided the volatility that marked previous years even as a change in Italy’s government stalled, Portugal’s coalition faltered, and Cyprus required a messy bailout. Draghi has cited the ECB’s unlimited bond-buying pledge, announced last year and so far untapped, as a reason for calmer markets. Yields on Spanish and Italian sovereign bonds have fallen in the past 12 months and Germany’s benchmark DAX stock index is near a record high.

“It all looks a bit better than we thought,” said Evelyn Herrmann, an economist at BNP Paribas SA in London. “Our central case is a very modest recovery, and we’re still not overly bullish for the second half of the year. The euro-zone recovery is very sensitive to all kinds of shocks.”

Lending decline

One area of stress remains in corporate access to bank credit. Lending to companies and households across the region has dropped for more than a year and fell the most on record in June. A review of banks’ balance sheets to be conducted by the ECB has probably been delayed until the first quarter of 2014 as the central bank says it can’t start preparing until European Union lawmakers vote on the legislation, which won’t be before September.

The review is part of a plan to strengthen the region’s financial system by building a banking union comprising ECB oversight, a single resolution mechanism for winding up failing lenders, and common rules for deposit guarantees. A European Commission proposal last month to set up a 55 billion-euro backstop for handling failing banks faces opposition from Germany, which has warned it may violate the EU’s basic laws by usurping national control over finances.

Overseas markets

In the meantime, economic performance remains patchy. An unexpected drop in French industrial production in June underlined the government’s struggle to revive growth in the region’s second largest economy. Output fell 1.4 per cent from the previous month, the state statistical institute Insee said on August. 9. That’s more than any of the 22 economists in a Bloomberg News survey predicted. France is also due to release data for second-quarter GDP on August 14.

“The upside for domestic demand in the euro zone is likely to remain constrained,” said Howard Archer, Chief European Economist at IHS Global Insight in London. “Widespread restrictive fiscal policy, persistently tight credit conditions in many countries, and elevated and still likely to rise further unemployment” are depressing consumption, he said.

The euro area’s path out of recession will also be defined by conditions in major export markets such as the UK, the US and China. There, indications are improving.

‘Slight growth’

UK industrial output beat forecasts in June, and the economy as a whole expanded 0.6 per cent in the second quarter. In China, July industrial output rose more than expected after a larger-than-forecast rebound in exports eased concern that a credit squeeze in the world’s second-biggest economy would curb growth.

The US economy grew at a 1.7 per cent annualised rate from April through June after a 1.1 per cent pace in the first quarter. Growth will climb to an annualised rate of 2.5 per cent in the second half of this year, economists’ estimates compiled by Bloomberg show.

For the whole of 2013, the ECB forecasts a contraction for the euro-area economy of 0.6 per cent, before an expansion of 1.1 per cent in 2014. Inflation is expected to fall to 1.4 per cent in 2013 and 1.3 per cent in 2014, below the 2 per cent target.

“There’s still some fiscal adjustment going on and that’s weighing on consumption, as well as banks in the south not being in a position to support the economy,” said Laurence Boone, Chief European Economist at Bank of America Merrill Lynch in London. “The consensus is for slight growth and we wouldn’t expect anything much more buoyant than that.” — Bloomberg