Euro zone growth fails to accelerate in Q4

BRUSSELS: The euro zone economy ended last year with stable growth, missing expectations as expansion rates in the region's three largest nations fell short of forecasts and Greece and Portugal contracted.

A hoped-for pick-up in growth failed to materialise because businesses ran down stocks in France, snow and cold hit construction in Germany and the Greek economy shrank sharply.

German data and a sentiment indicator suggested the country's economic recovery remained on track and was likely to broaden out, though a government economic advisor said this year's growth rate might well be lower than expected.

The European Union's statistics office Eurostat said gross domestic product in the 16 countries using the euro at the time grew 0.3 percent in the October-December period, the same as in the third quarter, and 2.0 percent year-on-year.

Economists had forecast the bloc would grow by 0.4 percent and 2.1 percent respectively. A number now expect a pick-up in the first quarter, albeit dampened by austerity measures in many member states.

"As we all know there was a cold snap in December, which disrupted construction and trade activity, and the acceleration in industrial activity was insufficient to offset this, so the underlying picture looks more benign," said Martin van Vliet at ING.

German gross domestic product increased by 0.4 percent, against expectations of a 0.5 percent rise and decelerating from 0.7 percent in the third quarter.

However, German analysts and investors remain convinced of the health of Europe's largest economy, based on a small rise in February's ZEW sentiment indicator.

In France, the economy grew just 0.3 percent, half the forecast increase and the same level as in July-September, despite a rush to buy cars before a French scrappage subsidy scheme ended last year.

A strong negative factor was businesses running down stocks.

French Economy Minister Christine Lagarde said she hoped for stronger growth in the first quarter of 2011 and maintained the government's forecast for expansion this year of 2 percent.

Italian growth was also lower than expected, at just 0.1 percent, while the Dutch surprised on the upside.

The euro slipped against the dollar after the release of the French and German data, although it then recovered to hold above Monday's three-week low.

It also fell to a four-week low against sterling on speculation that UK rates will rise to stem inflation and a 10-year low versus the Swedish crown after Sweden's central bank signalled a slightly faster pace of interest rates rises.

Harsh winter weather played a role in the final quarter, giving some hope for a stronger start to 2011. Construction in particular was hit hard and can be expected to rebound.

Nick Kounis, economist at ABN AMRO in Amsterdam, said the weather may have cut 0.3 percentage points off German growth, but this would also have boosted output in the energy sector.

"We are probably in a moderate recovery scenario which will gather pace through the year as labour markets get better," he said. "It's not going to be incredibly buoyant."

Data from across the euro zone pointed again to a twin-speed Europe -- with a broadly healthy core of northern European countries continuing to expand, while debt-burdened periphery nations struggle.

Data on Monday showed Portugal's economy shrank 0.3 percent in the last quarter of 2010, reversing a third-quarter expansion.

The risk premium investors demand to hold Portuguese government debt against German bunds has risen back above 400 basis points since the start of the month, a sign it is viewed as potentially next in line for an EU bailout after Greece and Ireland.

Greece's recession deepened, with contraction of 1.4 percent from the third quarter against expectations of a 1.2 percent decline. The country's central bank said the economy would shrink for a third straight year in 2011 with gross domestic product dropping at least 3 percent.

Spreads of Greek versus German bonds widened by 26 basis points to 860.

Spain, which markets appear to view as under less of a threat in debt terms, grew by 0.2 percent in the fourth quarter after stagnating in the previous three months.

"The real problem is the divergence across the economies, with the strength mainly coming from core Europe, with Germany leading ... In countries like Italy, Spain, Portugal you don't see a turnaround and domestic demand continues to be weak," said Luigi Speranza, economist at BNP Paribas.

Outside the euro zone, Sweden's central bank raised interest rates for a fifth time in the light of strong growth there of nearly 7 percent year-on-year in the third quarter.

In contrast, Britain's economy shrank in the last months of the year, prompting warnings of a grim 2011 as the government embarks on the deepest spending cuts in a generation.

Inflation, rising to double the Bank of England's target in January, highlights the country's dual problems of stagnation and spiralling prices.