By Jan Strupczewski BRUSSELS, Nov 12 (Reuters) - Euro zone economic growth slumped in the July-September period versus the previous quarter and is likely to slow further as the divergence between robust Germany and the weaker euro zone periphery grows. The European Union's statistics office, Eurostat, said gross domestic product in the 16 countries using the euro grew 0.4 percent in the third quarter against 1.0 percent in the second three months. GDP expanded 1.9 percent year-on-year. Economists said the risk of another recession was small, but growth could slow to a quarterly rate of 0.2-0.3 percent in the coming quarters and annual growth should ease to 1.1-1.4 percent next year from an expected 1.7 percent in 2010. "We expect euro zone growth to be muted over the coming months in the face of serious headwinds, most notably significant fiscal tightening increasingly kicking in, slower global growth and recurrent sovereign debt problems," said Howard Archer, economist at IHS Global Insight. The slowing growth was also signalled by industrial production in September which defied market expectations of a small monthly rise and fell 0.9 percent, cutting the annual increase to 5.2 percent against expectations for 7.1 percent. "The September weakness implies a weak carry over into the fourth quarter, suggesting a continuation of the growth slowdown," said Ken Wattret, chief eurozone market economist at BNP Paribas. The third quarter expansion was mainly thanks to continued robust growth in the euro zone's biggest economy, Germany, which grew 0.7 percent on the quarter, for a 3.9 percent year-on-year rise. The second biggest, France, saw GDP growth of 0.4 percent quarter-on-quarter and 1.8 percent year-on-year. "In the coming quarters...tensions will continue to mount because the German economy looks set to outperform the rest of the euro zone for years to come," said Christoph Weil, economist at Commerzbank. He said that while budget deficit cuts will be a significant burden on demand in the euro zone periphery -- Greece, Portugal, Spain and Ireland -- in Germany, fiscal policy would only slightly dampen economic activity. Also, the German economy had substantially improved its competitiveness in the last few years, while other euro zone countries did not, he said. In Greece which needs economic growth to convince markets it will be able to repay its debts, the economy shrank 1.1 percent on the quarter, for a 4.5 percent annualised fall. "National divergence is, and will remain, a key theme when it comes to growth in the euro zone. We continue to expect Germany to outperform, while the fiscally distressed economies in the periphery will suffer most," Wattret said. Portugal, which like Greece has introduced tough austerity measures to regain market trust, surprised economists on the upside with 0.4 percent quarterly growth. But the better Portuguese growth came from strong exports, while domestic demand is likely to have suffered from the budget austerity steps. "In terms of impact of fiscal consolidation, the worst is probably behind us in Greece, while Portugal has just started to feel the pain. Exports will remain a swing factor for the future growth performance in both countries as domestic demand continues to contract," said Tullia Bucco at UniCredit. A more detailed breakdown of the GDP data from Eurostat is not yet available, but economists said the third quarter euro zone expansion was likely to be driven by investment and exports, while private consumption may have been weak. (Reporting by Jan Strupczewski, editing by editing by Rex Merrifield) Keywords: EUROZONE ECONOMY/ (email@example.com; +32-2-287 6837; Reuters messaging: firstname.lastname@example.org) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.
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