Euro zone recovery slows more than expected in third quarter

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 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 euro zone economies grew by a slower than expected 0.1%. In the previous quarter it had grown by 0.3% – the first expansion in 18 months.

Today’s figures show that the French economy contracted by 0.1%, snuffing out signs of revival from robust growth in the previous three months.

It had been expected to post quarterly growth of 0.1% and has now shrunk in three of the last four quarters.

German growth slowed to 0.3%, 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 euro zone. The Bank of France predicts the economy will expand by 0.4% in the last quarter of the year but the government’s labour and pension reforms are widely viewed as too timid.

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.

Talk of recovery rings hollow as unemployment still high

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

However, with unemployment in the bloc running above 12% 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%, the weakest level in four years, when France was emerging from a deep recession.

Italy matched France’s performance, shrinking by 0.1%. The Netherlands eked out 0.1% growth in the three month period.

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% and ending nine quarters of slippage. The government is forecasting growth of 1.1% next year but most analysts are less upbeat.

Spain reported last month that it had pulled clear of recession in the third quarter, albeit with quarterly growth of just 0.1%, 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% in the third quarter following a stunning 1.1% expansion in the second quarter. Unlike other embattled euro zone states, unemployment has started to fall there too.

Cyprus, still in the midst of an austerity programme in return for being bailed out, contracted by 0.8% on the quarter while Greece’s deep recession eased a little.

oubts 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.

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.