Euro Zone growth slows

City A.M. Reporter

zone economic growth slumped in the July-September period versus the previous quarter and is likely to slow further as the divergence between robust Germany and the weaker euro zone periphery grows.

The European Union's statistics office, Eurostat, said gross domestic product in the 16 countries using the euro grew 0.4 per cent in the third quarter against 1.0 per cent in the second three months. GDP expanded 1.9 per cent year-on-year.

Economists said the risk of another recession was small, but growth could slow to a quarterly rate of 0.2-0.3 per cent in the coming quarters and annual growth should ease to 1.1-1.4 per cent next year from an expected 1.7 percent in 2010.

"We expect euro zone growth to be muted over the coming months in the face of serious headwinds, most notably significant fiscal tightening increasingly kicking in, slower global growth and recurrent sovereign debt problems," said Howard Archer, economist at IHS Global Insight.

The slowing growth was also signalled by industrial production in September which defied market expectations of a small monthly rise and fell 0.9 percent, cutting the annual increase to 5.2 percent against expectations for 7.1 percent.

"The September weakness implies a weak carry over into the fourth quarter, suggesting a continuation of the growth slowdown," said Ken Wattret, chief eurozone market economist at BNP Paribas.

The third quarter expansion was mainly thanks to continued robust growth in the euro zone's biggest economy, Germany, which grew 0.7 percent on the quarter, for a 3.9 percent year-on-year rise. The second biggest, France, saw GDP growth of 0.4 percent quarter-on-quarter and 1.8 percent year-on-year.

"In the coming quarters...tensions will continue to mount because the German economy looks set to outperform the rest of the euro zone for years to come," said Christoph Weil, economist at Commerzbank.

He said that while budget deficit cuts will be a significant burden on demand in the euro zone periphery – Greece, Portugal, Spain and Ireland – in Germany, fiscal policy would only slightly dampen economic activity.

Also, the German economy had substantially improved its competitiveness in the last few years, while other euro zone countries did not, he said.

In Greece which needs economic growth to convince markets it will be able to repay its debts, the economy shrank 1.1 per cent on the quarter, for a 4.5 per cent annualised fall.

"National divergence is, and will remain, a key theme when it comes to growth in the euro zone. We continue to expect Germany to outperform, while the fiscally distressed economies in the periphery will suffer most," Wattret said.