Euro Zone Growth Stable in 4Q, but Below Forecasts

The euro zone economy ended last year with stable growth, failing to meet expectations for an acceleration as expansion in the three largest nations fell short of forecasts and Greece and Portugal contracted.

An expected pick-up in growth did not occur because businesses ran down stocks in France, snow and cold hit construction in Germany and the Greek economy shrank sharply.

But a separate survey suggested Germany at least should enjoy a more fruitful first quarter of 2011.

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

Economists had forecast the single currency bloc would grow by 0.4% and 2.1% respectively. A number now expect a pick-up in the first quarter, albeit dampened by austerity measures in many euro zone members.

"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%, against expectations of a 0.5% rise and decelerating from 0.7% in the third quarter.

Growth in the third quarter was already tempered after a very strong April-June period -- when the German economy powered ahead by 2.2% quarter-on-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%, half the forecast increase and the same level as in the July-September period, 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%.

Italian growth was also lower than expected, at just 0.1%, 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.

Snow and icy weather certainly played a role in the figures for 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."

TWIN-SPEED

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% in the last quarter of 2010, reversing a third-quarter expansion..

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

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

Spain, which markets appear to view as under less of a threat in debt terms, grew by 0.2% in Q4 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% 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 spiraling prices.