EU economies slow but Portugal surprises on the upside

12th November 2010, Comments 0 comments

Economic momentum in the European Union's top economies has cooled as expected, analysts said Friday, but in financially ailing Portugal, the pace picked up surprisingly in the third quarter.

Economists said the slowdown had been foreseen, given an exceptionally strong second quarter, and pinned their hopes on a resurgent Germany, the EU's largest economy.

German growth came to 0.7 percent in the third quarter following a stunning 2.3-percent gain in the second, the strongest for 20 years.

Meanwhile, France registered a more meagre expansion of 0.4 percent and Italy's economy slowed to growth of 0.2 percent. The 16-nation eurozone as a whole grew by 0.4 percent after a 1.0-percent spurt in the second quarter.

Portugal defied the trend in the July-September period, when its gross domestic product expanded 0.4 percent compared with the previous quarter, when it grew 0.2 percent, the national statistics institute (INE) said.

Compared with output 12 months earlier, the economy expanded by 1.5 percent.

INE said the gain "is due above all to a significant increase in exports of goods and services."

"These growth figures beat the highest market forecasts," said economist Filipe Garcia.

"We were expecting something around zero but it seems that household consumption was not as weak (as estimated) and that exports were really fantastic," Garcia said.

But Greece, which like Portugal is struggling to rein in spending and has had to pay dearly to borrow on the bond market, fared less well.

The Greek economy shrank by 4.5 percent in the last 12 months, official data showed on Friday pointing, with GDP contracting 1.1 percent in the third quarter from output in the second quarter, data from the ESA statistics agency said.

"Economic sentiment has deteriorated substantially, there is a huge fall in consumer confidence, in business expectations," said Dimitrios Maroulis of Alpha Bank.

"What we need is to revitalize confidence and make consumers feel that the country will not go bankrupt so that they start spending again."

For the eurozone as a whole the principal driver is Germany.

"Germany is again the eurozone's growth engine," said Thilo Heidrich, an analyst from Postbank.

Carsten Brzeski, from ING bank, was equally upbeat, saying: "This year can still go down in the annals as the best growth year since German reunification" in 1990.

Significantly, growth in Germany was broad-based, the statistics office said, with both domestic and foreign demand making a positive contribution.

Chancellor Angela Merkel has come under fire both from European partners and around the globe for not doing enough to boost domestic demand and relying too heavily on Germany's world-class export machine.

"The German one-engine economy solely driven by exports has been replaced by a more balanced one, thereby making the upswing more robust," said Andreas Rees from UniCredit.

In Germany's neighbour France, the second key force in the eurozone, Finance Minister Christine Lagarde said she was sticking to a growth forecast of 2.0 percent this year and hailed the third-quarter gain as a "good figure."

But analysts cautioned that the results were deceptive.

Nicolas Bouzou of the Asteres research group criticized what he called the government's "soothing rhetoric" and said the third quarter growth figure should not obscure "the great fragilities in the French economy."

With the eurozone increasingly reliant on heavyweight Germany, some analysts have warned that a loss of steam was in the offing amid signs the breakneck pace of growth in Berlin was decelerating.

And several economists cautioned that a re-emergence of a debt crisis in the eurozone's "periphery" countries such as Ireland and Portugal could yet exert significant downward pressure on the wider European economy.

Ireland's cost of borrowing hit record highs recently, placing Europe's bond markets under serious strain.

The leap fuelled fears that the eurozone debt and deficit crisis could be entering a dangerous second phase just six months after a massive bailout of Greece, to which Germany was the biggest contributor.

Portuguese bond yields also hit historic peaks on Thursday.

"With the periphery looking worse and worse, we still see the eurozone's recovery grinding to a halt next year, which should mean further downward pressure on the euro," warned Jennifer McKeown from Capital Economics.


© 2010 AFP

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