EU economies slow but Germany offers hope

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Growth in the European Union's top economies has cooled, statistics showed on Friday, but analysts said a slowdown was expected after an exceptional second quarter and pinned their hopes on a resurgent Germany.

The European Union's top economy, Germany, grew by 0.7 percent in the third quarter, following stunning 2.3-percent growth in the second quarter of the year -- 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.

"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.

And German Economy Minister Rainer Bruederle said: "After the extraordinary growth in the second quarter, the German economy continued its dynamic upswing in the third quarter."

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"The German one-engine economy solely driven by exports has been replaced by a more balanced one, thereby making the upswing more robust," said Andreas Rees from UniCredit.

"At first sight, the latest figure looks like a dramatic slowdown. However, and clearly, there is no -- repeat no -- reason for being disappointed," added the economist.

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 two percent this year and hailed the third-quarter growth as a "good figure."

For its part, Berlin is counting on growth of 3.4 percent this year.

However, with the eurozone increasingly reliant on heavyweight Germany, some analysts warned a slowdown was in the offing amid signs the breakneck pace of growth in Berlin was decelerating.

In Italy, economic growth slowed to 0.2 percent in the third quarter after expansion of 0.5 percent in the second quarter. This was half the analyst consensus forecast of 0.4 percent.

While Germany's export motor continues to purr nicely, some forward-looking surveys have indicated a downturn around the corner and both industrial orders and industrial production figures have disappointed recently.

The government forecasts growth of 1.8 percent in 2011.

And several economists cautioned that a re-emergence of a debt crisis in the eurozone's "periphery" countries like 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.

And even the more bullish Brzeski said: "The re-emergence of the sovereign debt crisis shows that there is no room for complacency."

Demonstrating the hardships faced by the eurozone's weaker countries, the Greek economy shrank by 4.5 percent in the last 12 months, indicating the trauma Athens has suffered since a crippling debt crisis earlier this year.

Data from the Netherlands showed that the economy there shrank by 0.1 percent in the third quarter.

On Thursday, Spain with the fifth-biggest economy in the EU, turned in zero growth in the three months to September.


© 2010 AFP

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