Eurozone growth slows as winter bites

By Ralph Atkins in Frankfurt

Published: February 15 2011 08:30 | Last updated: February 15 2011 12:57

Severe winter weather hit eurozone growth late last year but the region’s economy still managed to expand at a modest rate and outpace the UK.

Gross domestic product in the 17 countries that share the euro grew by 0.3 per cent in the fourth quarter compared with the previous three months, according to Eurostat, the European Union’s statistical office.

The pace of expansion, which was the same as in the previous quarter, was slower than expected but reflected the impact of exceptionally bitter weather, particularly on Germany – where construction activity contracted by almost a quarter in December.

The UK economy contracted by 0.5 per cent in the fourth quarter, while the US reported 0.8 per cent growth.

The latest data confirmed that the recovery remained intact, economists said, powered by export-orientated Germany, the region’s largest economy. With better weather, Germany’s economy would have expanded at about the same pace as the US, said Gilles Moec, European economist at Deutsche Bank, adding: “Germany continues to roar.”

In turn, continuing eurozone growth will encourage the European Central Bank to take further steps to phase out exceptional help for eurozone banks and consider higher interest rates to combat rising inflation.

Forward-looking indicators such as purchasing managers’ surveys, suggest eurozone growth had regained momentum at the start of 2011, with the debt crises in countries on the region’s “periphery”, such as Greece, Ireland and Portugal, continuing to have little impact.

“The periphery has proved to be less connected to the ‘core’ than we might have expected,” said Robert Barrie, European economist at Credit Suisse. That contrasted with the rapid contagion seen during the global financial crisis that followed the collapse of Lehman Brothers late in 2008.

Throughout last year, Germany enjoyed a dramatic recovery, proving best-placed among the industrialised economies to benefit from the upturn in global trade. The country’s statistical office said investment and consumer spending had also boosted growth in the final quarter. German GDP expanded by just 0.4 per cent, however, compared with 0.7 per cent in the third quarter and 2.2 per cent in the second quarter.

Across the eurozone, the pace of recovery continued to vary significantly. The Netherlands and Austria each enjoyed GDP rises of 0.6 per cent after benefiting from trade with Germany, their larger neighbour.

France and Italy reported more modest growth, however, with respective GDP rises of just 0.3 per cent and 0.1 per cent. French growth benefited as consumers rushed to take advantage of tax incentives for car purchases, boosting their overall spending.

Fiscal austerity measures would act as a significant damping factor on eurozone growth in 2011, economists warned. But a 0.2 per cent GDP expansion in the fourth quarter in Spain, where fiscal austerity measures are already biting, offered comfort that the impact of such steps may prove less severe than feared.

Ireland, where the debt crisis has been exacerbated by a banking crisis, is expected to benefit from a strong export performance. Portugal’s economy is contracting, however, and Greece remains in severe recession. Greek GDP plunged by a further 1.4 per cent in the fourth quarter, while Portugal saw a 0.3 per cent fall.