Euro zone Q3 recession exit less robust than thought

By Jan Strupczewski

BRUSSELS (Reuters) - The euro zone economy jumped out of recession in the third quarter, data showed on Friday, but with slightly less spring than expected after growth in the area's top three economies fell short of market forecasts.

Gross domestic product in the 16 countries using the euro rose 0.4 percent quarter-on-quarter after five consecutive quarters of shrinking output, but was 4.1 percent lower year-on-year, the European Union's statistics office said.

Economists polled by Reuters had on average forecast quarterly growth of 0.5 percent and a 3.9 percent annual decline.

"The euro zone exited recession at a trot rather than a canter in the third quarter," said Howard Archer, economist at IHS Global Insight.

For graphics on growth see:

http://graphics.thomsonreuters.com/119/EZ_GDPRL1109.gif

Germany, France and Italy all reported a third-quarter increase in economic output, but the German 0.7 percent quarterly growth was below expectations of 0.8 percent, the French 0.3 percent increase only half of what was expected and the Italian 0.6 percent fell short of the 0.7 percent consensus.

Italy and the Netherlands returned to growth, but Spain continued to contract albeit at a significantly reduced pace.

A more detailed breakdown of the data will only be available on December 3 but economists said net exports and inventory build-up added to growth, while household consumption was weak and investment remained in recession.

"In other words, domestic demand remains the big weak spot," said Aurelio Maccario, economist at UniCredit Group.

END OF EUROZONE RECESSION

The growth ends the deepest economic downturn in Europe since World War Two, brought on by a global financial crisis, but economists say recovery is likely to remain fragile.

The European Commission expects that fourth-quarter growth would slow to 0.2 percent quarter-on-quarter and then to 0.1 percent in the first two quarters of 2010.

"This loss of momentum is expected to be the consequence of the withdrawal of some stimulus measures, including car scrappage schemes and employment support measures," said Archer.

Economists said restocking at companies, which could be helping growth now, would also be less of a factor toward the middle of 2010. A strong euro, rising unemployment and still tight credit conditions will also dampen growth prospects.

"The upswing is unlikely to gather further momentum in 2010," said Maccario.

"On the contrary, a growth slowdown seems likely, because the boost factor represented by the inventory build-up will probably fade, and so will momentum in car registrations. With exports expected to ease on a renewed slowdown in world growth and fixed investment still in troubled waters it's not easy to see what could trigger a sustainable upswing," he said.

Growth is seen accelerating steadily from the third quarter of 2010 to reach 0.5 percent in the second quarter of 2011.

"The likely fragility of the recovery means that both governments and the ECB need to be wary about withdrawing stimulus measures too soon or too aggressively," Archer said.

(Reporting by Jan Strupczewski, editing by Dale Hudson and Toby Chopra)

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