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Euro zone posts growth, downturn expected

A machine counts and sorts out euro notes at the Belgian Central Bank in Brussels.


The 17-nation euro zone economy grew a modest 0.2 per cent in the third quarter from the second, the EU said on Tuesday, lifted by France and Germany, but economists say the bloc is almost certainly heading for a recession.

Growth for the July-September period was right in line with the expectations of economists polled by Reuters, who forecast a 0.2 per cent rise, despite the sovereign debt crisis that is badly weakening business confidence in many countries and putting consumers off spending.

Germany and France, the euro zone's two biggest economies, grew 0.5 per cent and 0.4 per cent respectively, the European Union's statistics office Eurostat said, helped by consumer spending and business investments, particularly in Germany.

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"The fact that the real economy still managed to grow amidst the escalating debt crisis is somewhat of a relief," said Martin van Vliet, an economist at ING. "However, looking beneath the surface, things don't look so rosy."

A nasty mix of inflation, slowing exports and rising unemployment in the euro zone bode poorly and many economists expect a mild recession in Europe from the fourth quarter. European Central Bank President Mario Draghi has also predicted a "mild recession" in the bloc by the end of the year.

The worsening outlook could add to pressure for the European Central Bank to further ease its monetary policy in the hope of supporting the region's economy.

The ECB cut interest rates by 25 basis points to 1.25 per cent this month and many economists expect another cut in December.

Stagnation in Spain, Belgium and a contraction in the Netherlands and Portugal appeared to signal that worse is to come and a spurt in growth over the summer was temporary.

Spanish figures 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 days away.

Euro zone GDP rose 1.4 per cent in the quarter compared to the same period a year ago, partly helped by surprisingly strong industrial production in August, but that also marked the end of a two-year run of manufacturing growth.

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For the 27-nation EU, GDP also rose 0.2 per cent on a quarter-over-quarter basis and by 1.4 per cent compared with the same quarter in 2010.

"The key point is that this is all history," said Jonathan Loynes, chief European economist at Capital Economics.

"Forward-looking indicators suggest that the euro-zone economy is likely to drop back into recession in the fourth-quarter and beyond," he said.

That was underscored by a survey from Germany's ZEW economic think tank on Tuesday that showed German analyst and investor sentiment slumping in November, the ninth monthly decline in a row.

Euro zone industrial production figures released by Eurostat on Monday pointed to a sharp contraction towards the end of the year and the risk of a double-dip recession.

The slide in output at euro zone factories was the biggest since February 2009 – when the economy was reeling from the worst financial crisis since the 1930s.

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