Eurozone GDP Growth Slows As Germany Stagnates, Italy Contracts

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Eurozone economic growth slowed more than expected in the fourth quarter as the German economy stagnated and the Italian economy unexpectedly contracted.

Gross domestic product rose 0.1% on a sequential basis in the fourth quarter, flash estimate from the Eurostat showed Friday. Growth slowed from 0.4% recorded in the third quarter. Economists had forecast 0.3% rise in GDP.

"The disappointing Eurozone growth data for fourth quarter 2009 are a sobering reminder that recovery from financial-crisis-led recessions tends to be slow and protracted, and might not prove very supportive in calming market's fears about the region," ING Bank economist Martin van Vliet said. According to the economist, the anemic pace of fourth quarter growth makes crystal clear that the Eurozone economy cannot yet stand on its own feet.

Compared to the previous year, GDP fell 2.1%, slower than a 4% contraction recorded in the third quarter. Over the whole year 2009, GDP fell by 4%.

The German economy, the biggest in Europe, stagnated in the fourth quarter after a healthy 0.7% growth in the third quarter. Italy's economy contracted 0.2%, reversing 0.6% gain. Meanwhile, the French economy logged 0.6% growth in the final quarter, up from 0.2% in the third quarter.

Capital Economics expect Germany to regain its position at the head of the recovery as it benefits from a strong competitive position. However, the firm is pessimistic regarding the southern economies given the need for aggressive fiscal consolidation and household deleveraging in some cases. "With fiscal consolidation threatening to prevent a meaningful pick-up in domestic spending, the downside risks for the region are growing," Capital Economics' Senior European Economist Jennifer McKeown said.

Contraction eased to 0.1% from 0.3% in Spain. Fall deepened in Greece as the country struggles with mounting debt. The economy contracted for the fifth straight quarter. The GDP fell sharply by 0.8% in the fourth quarter on a quarterly basis, following the prior quarter's 0.5% decline. Portugal's economy stagnated. Commerzbank analyst Christoph Weil pointed out that the main cause for the slowdown in the euro area economic growth is debt issues in some Eurozone periphery countries.

Thursday, European leaders have reached in a deal to help Greece tackle its debt crisis and pledged to bring stability in the Eurozone. They said Greece must take more measures to control its huge debts and needs to cut its budget deficit by 4% this year. Currently, Greece's public debt is at a staggering EUR 300 billion, with its deficit rising to 12.7%, four times higher than Eurozone rules allow.

Weil noted that Greece, Spain, Portugal and Italy still have to make considerably efforts to overcome the effects of the crisis. "These countries' economies, jointly accounting for a third of the Eurozone economy, will barely grow in the coming quarters either and are therefore preventing a stronger recovery of the Eurozone economy," he cautioned.

In other Eurozone nations, growth slowed in Austria and the Netherlands, while accelerated in Slovakia. The pace of GDP decline eased in Cyprus.

BNP Paribas economist Clemente De Lucia expects Eurozone GDP to increase over the coming quarters, albeit at a moderate pace. "Large spare capacities and the ongoing deterioration in the labor market are likely to weigh on domestic demand. By contrast the external sector should continue to support growth," the economist added.

The European Central Bank that held its key interest rate unchanged at a record low of 1% since June last year expects the Eurozone economy to grow between 0.1% and 1.5% in 2010 and between 0.2% and 2.2% in 2011. Repeating his previous statement, the central bank's chief Jean-Claude Trichet said on February 4 that Eurozone recovery would be uneven.

Economic growth in the EU27 eased to 0.1% in the fourth quarter from 0.3% in the third quarter. Compared to the previous year, the economy contracted 2.3% and in the whole of 2009, the region shrank 4.1%.

During the fourth quarter, U.S. GDP increased by 1.4% compared with the previous quarter, after 0.6% rise in the third quarter. Annually, GDP rose 0.1% versus a decline of 2.6% in the third quarter.

(Market News Provided by RTTNews)