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With France stalling, eurozone recovery comes to near halt

By Leigh Thomas and Martin Santa

The euro zone economy all but stagnated in the third quarter with France’s recovery fizzling out and slower expansion in Germany.

The 9.5 trillion euro economy pulled out of its longest recession in the previous quarter, record high unemployment, lack of consumer and market confidence continue to choke a more solid rebound.

In the three months to September, the combined economy of the 17 countries sharing the euro grew by a slower than expected 0.1 per cent. In the previous quarter it rose 0.3 per cent – the first expansion in 18 months.

The euro fell to a session low in reaction to Thursday’s news.

The French economy contracted by 0.1 per cent, snuffing out signs of revival from robust growth in the previous three months. It had been expected to post quarterly growth of 0.1 per cent and has now shrunk in three of the last four quarters.

German growth slowed to 0.3 per cent, from a robust 0.7 in the second quarter, but Europe’s largest economy clearly remains in much better shape. Its performance matched forecasts. France is becoming a focus for concern within the currency bloc. The Bank of France predicts the economy will expand by 0.4 per cent in the last quarter of the year but the government’s labour and pension reforms are widely viewed as too timid.

“It was particularly disappointing to see France suffer a renewed dip of 0.1 per cent quarter-on-quarter in GDP which highlights concern about its underlying competitiveness,” Howard Archer, an economist with IHS Global Insight, said.

A report on French competitiveness by the Paris-based Organisation for Economic Cooperation and Development warned that it is falling behind southern European countries that have cut labour costs and become leaner and meaner.

“To reduce the economic lag and lost time, France needs to keep up structural reforms,” OECD chief Angel Gurria said.

The report will be hard for the government to ignore since it was commissioned by President Francois Hollande.
German growth was fuelled by domestic demand. Exports faltered, another indication of the malaise gripping the rest of the euro zone.

“Positive impulses came exclusively from inside Germany,” said the German Statistics Office.

The European Commission forecasts the currency area will shrink by 0.4 per cent over 2013 as a whole before growing by a modest 1.1 per cent in 2014. It sees expansion accelerating to 1.7 per cent in 2015.

However, with unemployment in the bloc running above 12 per cent and one in two young people out of work in Greece and Spain, talk of recovery rings hollow.

Compounding the French gloom, private sector payroll data showed some 17,000 jobs were destroyed in the third quarter, while inflation slowed in October to 0.7 per cent, the weakest level in four years, when France was emerging from a deep recession.

PERIPHERY PAST THE WORST?

Italy matched France’s performance, shrinking by 0.1 per cent. The Netherlands eked out 0.1 per cent growth.

A senior Italian official told Reuters this week that the euro zone’s third largest economy would return to growth in the last three months of the year, expanding by as much as 0.5 per cent and ending nine quarters of slippage.

The government is forecasting growth of 1.1 per cent next year but most analysts are less upbeat. The median forecast of economists polled by Reuters pointed to 2014 growth of just 0.5 per cent.

Spain reported last month that it had pulled clear of recession in the third quarter, albeit with quarterly growth of just 0.1 per cent, putting an end to a recession stretching back to early 2011.

Portugal is still struggling with austerity as part of its bailout plan yet managed to grow by 0.2 per cent in the third quarter following stunning 1.1 per cent expansion in Q2. Unlike other embattled euro zone states, unemployment has started to fall there too.

Doubts about an unsteady Italian coalition government’s ability to push through economic reforms remain a major concern for the euro zone. But France is climbing the worry list fast.

Both Spain and Portugal have had the outlook on their credit ratings raised to stable in recent days while Standard & Poor’s cut France’s rating to AA from AA+, still well above its Iberian neighbours but narrowing the gap.

The European Central Bank surprised markets with an interest rate cut last week, although that was more to do with evaporating inflation.

“The sluggish growth outlook implies that disinflationary forces will likely remain in place for the time being. Against this backdrop, further monetary easing by the ECB certainly cannot be excluded, said Martin van Vliet, an economist at ING.

On Wednesday, ECB chief economist Peter Praet raised the prospect of the bank starting outright asset purchases if things got too bad. Bundesbank chief Jens Weidmann took the opposite tack, saying rates should not stay at record lows for too long.

“ECB interest rates are far too low for Germany. Germany will probably grow significantly more strongly than the euro zone,” said Joerg Kraemer, chief economist at Commerzbank. “Early indicators point to similar growth in the fourth quarter.”

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