Euro zone growth rebounded more strongly than expected in the third quarter thanks to its three biggest economies, data showed, but economists said a looming slowdown would help keep ECB interest rates on hold.
The European Union statistics office said gross domestic product in the 13 countries using the euro rose 0.7 percent quarter-on-quarter in the July-September period against 0.3 percent in the previous three months.
In annual terms, the economy grew 2.6 percent, up from 2.5 percent in the second quarter. Economists had expected quarterly growth of 0.6 percent and a 2.5 percent annual expansion.
"This is backwards-looking data. Forward-looking indicators tell us that the economy will look in a much worse condition from Q4 onwards," said Ken Wattret, economist at BNP Paribas.
"You don't have to dig very deep to find problems for the economy, including difficulties in the financial markets, the risk of the credit crunch, the risk of a U.S. recession, the strength of the exchange rate, oil prices," he said.
Greece's Growth Slows Down
Expensive oil and a slowdown in home building already slowed Greek growth to 3.6 percent in annual terms from 4.1 percent in the second quarter, a Greek statistics official said.
Since the third quarter oil prices have jumped to new highs above $98 per barrel, the euro hit new peaks on a trade-weighted basis and three-month money market rates remain well above the European Central Bank's reference rate of 4.0 percent.
"I would be very surprised if we didn't see a slowdown, potentially a significant one, in the next couple of quarters," Wattret said. Societe Generale economist Oliver Gasnier expects 0.2 percent quarterly euro zone growth in the fourth quarter.
The expected slowdown is likely to keep the ECB from raising interest rates despite upside inflation risks, economists said.
"The sound third-quarter result is thus unlikely to have much influence on the ECB's decisions," said Christoph Weil, economist at Commerzbank.
"The bank too will have to lower its 2008 growth projection of 2.3 percent quite considerably next month. Consequently, we do not envisage the bank raising interest rates in 2008 even when the subprime crisis is over," he said.
Germany Led Surge
Germany, the euro zone's biggest economy, led the third-quarter surge with 0.7 percent quarterly growth fuelled by construction, investment in equipment and private consumption.
While a more detailed breakdown will not be available until Nov. 22, economists said stronger domestic demand in Germany was also seen in a big rise in imports, which wiped out any net contribution from trade in Europe's biggest exporter.
But Bear Stearns economist David Brown noted the robust data came just a day after Germany's ZEW business confidence index hit a 14-year low, showing vulnerability next year.
France saw its economy expand 0.7 percent in the third quarter, its fastest in just over a year, on rising private consumption and investment and a positive trade contribution.
The foreign trade result contrasted with long-standing French complaints about the negative impact of the record strong euro on its exports, which showed vibrant growth and outpaced also strong imports.
Spain Records Slower Growth
Economists said the third-quarter result pointed to full-year French GDP growth of 1.9 percent, below government forecasts but in line with European Commission projections.
In Italy, the third-biggest euro zone economy, GDP grew by 0.4 percent quarter-on-quarter thanks to rising activity in industry and services. Economists expect to see strong consumer spending when a detailed breakdown is published in December.
While 0.7 percent quarterly growth was solid for France and Germany, the same rate in Spain came as the lowest in 11 quarters. That took annual growth down to 3.8 percent from 4.0 in the previous quarter, but was still better than expected.
Spain was the only one of the four biggest euro zone economies to record slower quarterly growth in July-September.
It took a hit from problems piling up in the formerly booming housing sector, now dented by rising interest rates.
Dutch growth surged to 1.8 percent quarter-on-quarter, the highest in more than a decade, giving a 4.1 percent annual gain thanks to increased natural gas production.