August 6, 2010 / 11:20 AM / 10 years ago

Eurozone buoyant but recovery two-speed

BERLIN/ROME (Reuters) - A leap in German industry output over the second quarter and a moderate rise in Italian economic growth added on Friday to evidence the euro zone is in a robust recovery phase but with divergences within the bloc.

The Bank of Spain highlighted a divide between strength in Europe’s largest economies and a less impressive rebound in the currency zone’s laggards, estimating the Spanish economy grew by an anaemic 0.2 percent in the second quarter.

Economists fear Spain’s economy could contract again at the back end of the year as government debt-cutting measures kick in.

Italian GDP grew by 0.4 percent from the first quarter but the euro zone as a whole is expected to have expanded by 0.6 percent or more in the second quarter, suggesting much stronger growth from the likes of Germany.

“This 0.4 percent growth is pretty normal but given that it’s coming off the extraordinary fall in GDP during the recession, it shows the recovery is going to be slow,” said Giada Giani at Citigroup of Italy’s performance.

German industry output dropped by 0.6 percent on the month in June but following sharp rises in April and May, was up 5.4 percent over the second quarter as a whole, the biggest quarterly gain since German reunification in 1990.

“June’s modest fall in industrial production does not change the picture of a rapidly recovering industrial sector, which probably caused GDP to surge in Q2,” said Jennifer McKeown at Capital Economics, who forecast 1.2 percent Q2 GDP growth there.

GDP figures for Germany, France and the euro zone will be published next Friday.

A run of upbeat euro zone data so far in the third quarter, which European Central Bank President Jean-Claude Trichet said was surprisingly strong, goes some way to explain the contrast between the confident tone coming from the ECB and an uncertain U.S. Federal Reserve considering further policy easing.

Trichet said on Thursday he expected second quarter growth for the 16-nation currency bloc to have been “exceptional” although he still expects a slowdown further out as government austerity measures bite.

Friday’s pivotal U.S. jobs figures are expected to show employment fell for a second month running in July as more temporary census jobs ended and private hiring remained too weak to boost a fragile economic recovery.

French figures on Friday showed the continued health of China’s powerhouse economy is increasingly vital to the world, challenging the mantle of the United States.

France’s trade deficit fell more than expected in June as exports hit their highest level in nearly two years helped by higher trade with China.

SLOWDOWN STILL LIKELY

Since a European Union safety net for debt-laden countries was set up in May, fears of a full-blown sovereign debt crisis have receded, bonds from Spain, Portugal and Greece have sold well and intra-European government bond spreads have narrowed.

The premium investors demand of Spain on its 10-year bonds versus the equivalent debt of Germany stood at 143 basis points on Friday, down from a peak of around 224 bps in mid-June.

European bank stress tests, which threw up no disasters, have added to the improvement in market sentiment.

And Greece — the cradle of the debt crisis — won recognition from the IMF and EU on Thursday for its efforts to honour a draconian programme of spending cuts, tax hikes and other measures to stabilise public finances.

Nonetheless, most economists, and the ECB, expect a slowdown later this year and not just for countries like Spain.

“Signs have increased that the momentum will wane noticeably at the end of the year. Leading indicators suggest the world economy is losing some drive,” said Alexander Koch at Unicredit.

The OECD said on Friday its leading indicator for June pointed to a possible peak in growth in developed economies, with the index for the United States turning negative for the first time since February 2009.

But talk of a double-dip recession in Europe has all but evaporated.

“We consider that we have undoubtedly a recovery where the double-dip is totally out,” Trichet said on Thursday after the ECB left rates at a record-low 1.0 percent.

Writing by Mike Peacock. Editing by David Brough

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