November 14, 2013 / 7:41 AM / 4 years ago

WRAPUP 4-With France stalling, euro zone recovery comes to near halt

6 Min Read

* Pace of euro zone recovery slows more than expected
    * French economy shrinks, undercuts forecasts
    * OECD warns of economic reform inertia
    * German growth slows, exports hit
    * Spain pulled out of recession
    * Italian recession continues, may grow in Q4

    By Leigh Thomas and Martin Santa
    BRUSSELS/PARIS, Nov 14 (Reuters) - The euro zone economy all
but stagnated in the third quarter of the year with France's
recovery fizzling out and growth in Germany slowing.
    The 9.5 trillion euro economy pulled out of its longest
recession in the previous quarter but record unemployment, lack
of consumer confidence and anaemic bank lending continue to
prevent a more solid rebound.
    In the three months to September, the combined economy of
the 17 countries sharing the euro grew by a slower than expected
0.1 percent. In the previous quarter it rose 0.3 percent - the
first expansion in 18 months.
    The euro fell to a session low in response. 
    The French economy contracted by 0.1 percent, snuffing out
signs of revival in the previous three months. It had been
expected to post quarterly growth of 0.1 percent and has now
shrunk in three of the last four quarters.
    German growth slowed to 0.3 percent, from a robust 0.7 in
the second quarter, but Europe's largest economy clearly remains
in much better shape.
    France is becoming a focus for concern within the currency
bloc. The Bank of France predicts the economy will expand by 0.4
percent 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.
    "ECB interest rates are far too low for Germany. Germany
will probably grow significantly more strongly than the euro
zone," said Joerg Kraemer, chief economist at Commerzbank.
"Early indicators point to similar growth in the fourth
    The European Commission forecasts the currency area will
shrink by 0.4 percent over 2013 as a whole before growing by a
modest 1.1 percent in 2014.
    However, with unemployment in the bloc running above 12
percent 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 percent, the weakest
level in four years, when France was emerging from a deep

    Italy matched France's performance, shrinking by 0.1
percent. The Netherlands eked out 0.1 percent growth.
    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
percent and ending nine quarters of slippage. 
    Spain reported last month that it had pulled clear of
recession in the third quarter, albeit with quarterly growth of
just 0.1 percent, 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 percent in the third
quarter following stunning 1.1 percent expansion in Q2. 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 percent on the
quarter while Greece's deep recession eased a little.
    Doubts 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.
    "The sluggish growth outlook implies that disinflationary
forces will likely remain in place for the time being. Against
this backdrop, further monetary easing by the ECB certainly
cannot be excluded, said Martin van Vliet, an economist at ING.
    On Wednesday, 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.

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