Euro zone recovery comes to a standstill

Published Apr 7, 2010

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Europe's economy unexpectedly stagnated in the fourth quarter of last year as companies cut spending more than estimated.

Gross domestic product (GDP) in the 16-nation euro zone remained unchanged from the third quarter, when it rose 0.4 percent, Eurostat said yesterday. It had previously reported a fourth-quarter expansion of 0.1 percent.

Corporate investment fell 1.3 percent instead of the 0.8 percent estimated earlier.

The European economy is now showing signs of rebounding from its end-of-year relapse as the global recovery prompts companies to step up investment and offsets some concerns that Greece's fiscal crisis will hurt the euro region. While unemployment is at an 11-year high, economic confidence improved in March and the region's services and manufacturing growth accelerated to the fastest pace since August 2007.

"The first quarter will still be very weak followed by an economic rebound in current three-month period," said Christoph Weil, an economist at Commerzbank. "Exports will continue to drive an expansion this year."

Euro zone exports grew 1.9 percent in the fourth quarter from the previous three months, more than the 1.7 percent gain estimated earlier, yesterday's report showed. Household consumption was unchanged, and government spending declined 0.1 percent after rising 0.7 percent in the three months to September.

Asian economies are leading a worldwide recovery. The International Monetary Fund (IMF) forecasts the global economy will grow 3.9 percent this year after a 0.8 percent contraction last year, with China expanding 10 percent, almost five times the pace projected for the US. The euro zone economy might grow 1 percent, the IMF forecast.

Data "point to a continued recovery of the world economy, albeit at variable speeds across countries and regions", the Organisation for Economic Co-operation and Development (OECD) said in a report yesterday. "A number of factors are expected to bear down on activity in the very near term."

Germany, France and Italy - the euro zone's three largest economies - probably expanded 0.9 percent in the first three months of 2010 and might grow 1.9 percent in the current quarter, the OECD said.

Europe would see "a slow and bumpy recovery", said Colin Ellis, an economist at Daiwa Capital Markets Europe. "The euro area is set to rely disproportionally on trade this year and next."

The European Central Bank will probably keep its benchmark interest rate at a record low 1 percent today, according to all 62 economists in a Bloomberg survey.

From a year earlier, euro zone GDP declined a seasonally adjusted 2.2 percent in the fourth quarter, the statistics office said. For the full year, the economy contracted 4.1 percent after expanding 0.6 percent in 2008. - Bloomberg

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