Eurozone economy grew tepid 0.3 pct in 4th quarter

[February 15, 2011]  LONDON (AP) -- Europe's recovery gained little speed in the final three months of 2010, amid heavy snow in a number of countries and new spending cuts and tax increases across the single currency bloc.

The 16 countries that were using the euro at the end of 2010 -- Estonia only joined in eurozone in January -- grew by a modest 0.3 percent in the fourth quarter from the previous three month period, according to Eurostat, the European Union's statistics agency.

That's below the 0.8 percent equivalent rate in the U.S. but better than the 0.3 percent decline in Japan.

The fourth quarter growth means that the eurozone expanded by 1.7 percent in 2010, way more than many people had expected a year ago, when Europe's debt crisis exploded with concerns about Greece's ability to pay off its mountain of debts.

Despite the 2010 growth, the eurozone economy is still smaller than it was when it slid into recession at the end of 2008 as the financial crisis took hold following the collapse of U.S. investment bank Lehman Brothers. In 2009 alone, the eurozone economy shrank by a record 4.1 percent.

The tepid growth reported in the fourth quarter was in line with revised forecasts following earlier figures showing that Germany and France, Europe's two biggest economies, grew less than anticipated -- Germany's 0.4 percent increase was modestly below expectations but France's 0.3 percent was half what was expected.

Further weighing on overall growth was the news that two eurozone countries, Greece and Portugal, saw their economies contract as their governments imposed harsh spending cuts and tax increases to get their public finances into shape.

Greece, which received a euro110 billion ($148 billion) bailout from its partners last May, remained in a deep recession as its economy shrank by a further 1.4 percent during the fourth quarter. Figures for Ireland, the other eurozone country to need financial rescue, were not yet available.

Portugal, which is widely perceived to be the next most likely bailout candidate, posted a 0.3 percent decline, its first negative figure for a year. A country is not technically classified as being in recession unless it reports two consecutive quarters of falling output.

Despite the declines in Greece and Portugal, economic activity across the whole of the eurozone is expected to accelerate in the first quarter of 2011, if recent surveys are to be believed.

In its February survey, the ZEW institute reported Thursday that investors in Germany remain buoyant with more forecasting improving economic conditions over the coming six months than a renewed deterioration.

Germany has enjoyed a strong recovery from recession over the last year, partly because its high-value exporters have benefited from the pickup in global trade.

The European Central Bank, which sets interest rates for the euro countries, will have to tread a careful path over the coming months as the core countries, led by Germany, continue to outperform the smaller, more indebted nations.

Its task is complicated by the fact inflation in the eurozone is running at 2.4 percent and above its target of "close to, but below" 2 percent, largely on the back of higher energy and commodity costs.

If the current spike in inflation starts to impact on inflationary expectations and is shown up in wage deals, then it may have no option but to raise its benchmark interest rate from the current record low of 1 percent. That's hardly going to lead to many cheers on the streets of Athens, Dublin and Lisbon where times are already tough enough.

"Above-target inflation is putting pressure on the European Central Bank to raise interest rates but the periphery looks to be in need of further stimulus," said Chris Williamson, chief economist at Markit.

Eurostat also found that the wider 27-country EU grew by only 0.2 percent in the fourth quarter. The lower rate can be largely attributed to the surprise 0.5 percent contraction in Britain, reported last month.

[Associated Press; By PAN PYLAS]

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