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Euro zone GDP seen weak as optimism wanes

Thursday, 13 Feb 2014 | 6:48 AM ET

The euro zone economy is expected to have expanded at a modest rate in the fourth quarter, but economists warned of a weak and uneven recovery.

Gross domestic product (GDP) data for the final quarter of 2013 will be published Friday, with economists forecasting growth of around 0.2 percent, quarter-on-quarter.

Francois Guillot | AFP | Getty Images

"Growth of 0.2 percent is hardly a strong reading, but it is in line with our scenario of a modest and gradual recovery in the euro zone," Apolline Menut, European economist at Barclays, told CNBC.

(Read more: Euro soars as Draghi plays down deflation talk)

In the third quarter, the euro zone's economy grew by just 0.1 percent - a significant slowdown from an expansion of 0.3 percent in the second three months of the year.

The official fourth-quarter data, published by Europe's statistics agency Eurostat, also follows disappointing industrial production data.

Industrial production in the euro zone fell 0.7 percent on the month in December, according to data released Wednesday. A strong performance in November, however, mean economists still expect the sector to clock up 0.3 percent growth in the fourth quarter overall.

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"The latest hard data, particularly yesterday's industrial production numbers, have taken away some of the optimism created by strong sentiment indicators," Carsten Brzeski, senior economist at ING, told CNBC.

"The good news is that the recovery continues – the bad news is that the recovery remains weak."

Brzeski expected GDP growth for the fourth quarter to come in around 0.2 percent, as did Societe Generale.

(Read more: Why euro zone slowdown should worry the world)

"The December industrial production figures suggest that the economic momentum is unlikely to improve going into (the first quarter of 2014)," Soc Gen economists led by Michala Marcussen said in a research note.

"Overall, we are still heading towards a 'weak and uneven' recovery, as highlighted by European Central Bank (ECB) President Mario Draghi."

'Race to the bottom'

One of the themes of the euro zone's recovery - since it exited its longest recession in over 40 years in the second quarter of 2013 - has been a divergence between the performance of the region's economies.

Germany – sometimes dubbed the "powerhouse of Europe" – has generally outperformed its neighbors, while the economies of France and Spain and some others in "peripheral" Europe have often disappointed.

There are signs this gap could be narrowing, however.

Taking the industrial production data on a country level, for instance, almost all euro zone countries posted a fall in output. France's slipped by 0.3 percent while Spain's fell by 0.2 percent – but Germany's dropped 0.7 percent.

"Looking at the growth perspective , there is still a divergence in the euro zone, but this gap between the countries is reducing," Barclays' Menut said. "German will remain the growth driver, but we expect France, for instance, to continue on a moderate growth trend."

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(Read more: Euro zone business activity hits 2.5-year high)

Brzeski agreed some sort of convergence underway, but said: "I would rather call it a race to the bottom."

He added: "Tomorrow's GDP numbers should give some idea of the ongoing rebalancing of the euro zone economy: the periphery is improving, parts of the core are falling behind and in the middle of it all is Germany cruising along rather smoothly."

Stimulus hopes

This meager growth outlook is likely to increase pressure on the ECB to further loosen monetary policy. The central bank held fire at its policy meeting last week, with economists now expecting it to act in March.

"This keeps pressure on the ECB to provide further stimulus as soon as its March meeting, although the central bank will primarily be focused on inflation developments and money market interest rates," Howard Archer, chief European economist at IHS Global Insight, said in a note.

Archer forecast euro zone GDP would come in between 0.2-0.3 percent quarter-on-quarter in the fourth quarter.

Draghi played down fears of deflation in the euro zone last week, but concerns were heightened after official data revealed inflation fell to 0.7 percent in January – below the 0.9 percent expected by economists, and significantly lower than the ECB's 2 percent target.

And on Thursday, a quarterly survey released by the ECB revealed inflation is expected to remain below this target into 2016.

Deflation would certainly do nothing to help the euro zone's nascent recovery. While falling prices may be good news for consumers, they are bad for the economy, with demand stunted by consumers holding off spending in the hope of further price declines. It can also boost unemployment and even lead to economic depression.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google

Contact World Economy

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