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Investment Drop Slows Growth in Euro Zone

A sharp drop in investment and government spending more than halved quarterly euro zone growth for April to June, but this is unlikely to stop further ECB interest rate rises as analysts expect the economy to pick up.

European Union statistics office Eurostat said the economy of the 13 countries using the euro expanded 0.3% in the second quarter of this year against the previous three months, compared with 0.7% growth in the first quarter.

The data was in line with Eurostat's early estimate published in August and market expectations based on that figure.

"The slowdown in investment is the main reason for the slower GDP growth but we expect it to be temporary and GDP growth to pick up again in the coming quarters," said Aline Schuiling, senior international economist at Fortis.

Economists said the slowdown was temporary because of a partly weather-related slump in construction in the second quarter. This was likely to change in the third quarter.

A tightening labour market as well as still-high business and consumer confidence in surveys suggested growth would pick up soon. Schuiling forecasts third-quarter growth at 0.7% and that for the fourth quarter at 0.6%.

Subprime Impact "Tiny"

The European Commission said on Tuesday it was sticking to its August forecast that third-quarter growth would be in the range of 0.3-0.8%, giving a mid-point of 0.55%.

For the fourth quarter, the Commission kept its forecast of 0.2-0.8% and for the first quarter of 2008 it stood by the range of 0.2-0.9%.

The Commission said its forecasts mechanically extrapolated the past relationship between GDP growth and other economic data, but cautioned that only part of that data had been collected after the recent turbulence in financial markets.

The Commission has said the impact on the euro zone economy of the turbulence, caused by the U.S. subprime mortgage crisis, would be tiny. Economists, however, see the turmoil prompting the European Central Bank to keep rates on hold on Thursday.

But the bank is still likely to raise rates once or twice more by mid-2008 to stem inflationary pressure, they said. "The ECB ... will remain concentrated on robust growth perspectives -- we bet on a GDP rebound in the third quarter," said Aurelio Maccario, economist at UniCredit.

The growth mix should remain sound and the inflation outlook was far from reassuring, he said.

Investment, Government Spending

In year-on-year terms, the euro zone economy expanded 2.5% in the second quarter, slowing from a rate of 3.2% in the previous three months.

Quarterly growth in the euro zone is more than three times slower than in the United States but three times faster than in Japan.

Eurostat said the main reasons for the slower quarterly growth were an inventory drop, which shaved 0.1 percentage point off the result, and a slowdown in government spending and investment -- previously major growth engines.

Investment shrank 0.2% in the second quarter after expanding 2.0% in the previous three months. Government spending grew by only 0.1%, down from 0.8% in the first quarter.

By contrast, household spending, which stayed flat in the first quarter, rose 0.5%.

The contribution from trade was also positive with exports accelerating to show a rise of 1.1% quarter-on-quarter from 0.8% in the previous three months, and imports slowed to growth of 0.6% from 0.9%.

Separately, Eurostat said producer prices in the euro zone grew by 0.3% month-on-month for a 1.8% year-on-year rise, above market expectations of a 0.1% monthly increase and a 1.7% annual gain.

Contact Europe: Economy

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