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German, French growth should help euro zone exit recession

 

  • France's President Francois Hollande (R) and German Chancellor Angela Merkel attend a joint news conference at the Elysee Palace in Paris, May 30, 2013. REUTERS/Charles PlatiauFrance’s President Francois Hollande (R) and German Chancellor Angela Merkel attend a joint news conference at the Elysee Palace in Paris, May 30, 2013. REUTERS/Charles Platiau

By Martin Santa

BRUSSELS (Reuters) – The euro zone’s two biggest economies, Germany and France, both grew more than forecast in the second quarter, reinforcing expectations that data later on Wednesday will show the currency bloc has moved out of recession.

The German economy grew by 0.7 percent in the second quarter of 2013, its largest expansion in more than a year, thanks largely to domestic private and public consumption.

France’s economy expanded 0.5 percent, pulling out of a shallow recession to post its strongest quarterly growth since early 2011. The expansion was driven by consumer spending and industrial output, although investment dropped again.

Overall euro zone figures due at 0900 GMT (4:00 EDT) are likely to show the euro zone economy grew in the three months to June, moving out of recession after seven quarters.

“The euro zone is set for a gradual economic recovery, helped by a sharp slowing in the pace of austerity, an acceleration in global demand growth and a sustained easing of uncertainty and financial stress,” said ABN AMRO’s head of macro research Nick Kounis, adding that a number of drags on growth remain.

A Reuters poll taken before the German and French releases forecast an expansion of 0.2 percent in the second quarter, the same amount the 17-nation bloc’s economy shrank by in Q1.

The overall picture is likely to be mixed, as peripheral countries such as Spain, Greece and Portugal continue to struggle with high double-digit unemployment, on-and-off political rows and painful austerity.

The Reuters poll, published on Tuesday, suggested the euro zone economy is not likely to gain real momentum before 2015, with quarterly growth not seen exceeding 0.4 percent before then despite recent signs of improvement.

Euro zone industrial production rose in April and June, construction output picked up after a weak first quarter hit by bad weather and joblessness fell for the first time in more than two years in June.

“I suspect there was likely a modest overall pick-up in consumer spending, given improved confidence, moderate inflation and slowing job losses,” said Howard Archer, chief European economist at IHS.

“Business investment also likely fell at a reduced rate given improved business confidence and the fact that it has fallen markedly for an extended period.”

The European Central Bank has said it will keep interest rates at record lows for an extended period of time to assist the fragile recovery.

UNEVEN, BUMPY RECOVERY AHEAD

Recent economic data and sentiment surveys had suggested the German economy was picking up after contracting in late 2012 and a weak start to 2013.

But look south and there is a different picture.

The International Monetary Fund said earlier this month that Madrid’s reform progress, fiscal consolidation and crackdown on external imbalances were bearing fruit, but that urgent action was needed to create jobs and stimulate growth.

The scope and form of the austerity drive in the European Union is now changing. Policymakers still say adjustments in excessive deficits and high debt are essential. But they now emphasize that any action taken must not choke growth and must help create jobs.

ECB President Mario Draghi said this month that labor market conditions remained weak, though he expected the bloc’s growth to benefit from a gradual recovery in global demand.

“Overall, euro area economic activity should stabilize and recover at a slow pace. The risks surrounding the economic outlook for the euro area continue to be on the downside,” Draghi said after the ECB rate meeting on August 1.

(This story corrects number of euro zone countries)

(Writing by Catherine Evans; Editing by Jeremy Gaunt and Toby Chopra)

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