Eurozone growth just 0.2pc despite stronger France and Germany

City A.M. Reporter
Germany and France posted solid growth in the third quarter but those euro zone countries at the sharp end of the debt crisis dragged the overall figure for the bloc to a meagre 0.2 per cent.

The German economy grew 0.5 per cent in July-September, in line with market forecasts, and second quarter growth was revised up to 0.3 per cent from 0.1.

France expanded by 0.4 per cent on the quarter, having contracted by 0.1 per cent in the previous three months.

The euro area's debt crisis is likely to make matters worse in the months to come with countries such as Italy, Greece, Ireland, Portugal and Spain forced to adopt tough austerity measures in order to stop the bond market driving them towards default.

Economists say there is no visible growth strategy in place to counter those cuts.

"Looking ahead, sentiment indicators point to a significant growth slowdown, a contraction of the economy towards the end of the year is possible," Carsten Brzeski, economist at ING, said of the German economy, which has easily outstripped all others in the euro zone.

Newly-installed European Central Bank President Mario Draghi has predicted the bloc would be suffering a "mild recession" by the end of the year.

France has also rushed through belt-tightening measures, announcing 65 billion euros of tax hikes and budget cuts over five years earlier this month, as President Nicolas Sarkozy seeks to protect the country's top-notch credit rating without killing his chances of re-election in six months time.

"Positive growth means tax revenue, but there isn't enough growth so we have to manage our budget like you do at home, or like a company chief," labour minister Xavier Bertrand said after the GDP data were released. "If there's not enough money coming in then there must be less money coming out."

A report by the Lisbon Council on Tuesday said France's inability to make rapid adjustments to its economy should be ringing alarm bells for the euro zone.

It ranked France 13th out of 17 for its overall health, including its growth potential, employment rate and consumption, and 15th for its progress on economic adjustments, particularly on reducing its budget deficit and keeping a lid on unit labour costs.

Even those countries not under the cosh in debt terms enjoyed varying fortunes. Dutch GDP fell 0.3 per cent on the quarter while Austria and Slovakia grew by the same amount.

Spanish figures released late last week showed the euro zone's fourth largest economy ground to a halt in the third quarter, pushing it close to recession with elections only five days away.

The outlook is even bleaker with the debt crisis set to activity further and the likely winners of Sunday's general election promising to tighten the fiscal screws further.

Neighbouring Portugal, a recipient of an EU/IMF bailout, is already in recession and its slump deepened in the third quarter. Its economy shrank by 0.4 per cent over the three months, data showed on Monday.

"A weaker euro, very accommodative monetary policy and low funding costs have contributed to strong and solid economic growth," Brzeski said. "With ... France and Italy seemingly drowning in the maelstrom of the debt crisis, the German economy has lost its immunity. Austerity measures in France and Italy will also hurt German exporters."