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Euro zone GDP up on inventories, private demand weak

BRUSSELS - A jump in inventories and exports drove the euro zone out of recession in the third quarter, data showed, but falling investment and household consumption underlined concerns about the sustainability of the recovery.

The European Union’s statistics agency confirmed its earlier estimate that the economy of the 16 countries using the euro expanded 0.4 percent quarter-on-quarter in the July-September period, after five quarters of falling output.

Separately, Eurostat said retail sales were unchanged month-on-month and down 1.9 percent year-on-year, below market expectations of a 0.2 percent monthly increase but better than the forecast of a 2.4 percent annual decline.

“The bounce in GDP was mainly driven by government stimulus, external demand and temporary inventory effects. A self-sustaining recovery, however, is likely to require that consumer spending and business investment be the primary drivers of growth,” said Martin van Vliet, economist at ING.

“Against this backdrop, it is disappointing to see that the volume of retail sales failed to grow in October,” he said.

Eurostat said a build-up of inventories, depleted in the first half of the year, added 0.3 percentage point to the overall quarterly growth result for the euro zone. Government spending added 0.1 percentage point.

Exports and imports jumped in the third quarter, but exports increased more and net trade added 0.2 percentage point to the final outcome.

The rise in exports comes despite the sharp appreciation of the euro against the dollar — in the second quarter the euro traded on average a around $1.36 while the third quarter it was already on average at $1.43.

On a trade-weighted basis, however, the euro weakened 0.4 percent in the second quarter but appreciated 1.3 percent in the third quarter. Since the end of September it has risen a further one percent.

“Encouragingly, exports continued to recover despite the euro’s strength... but this was largely offset by an almost equally strong rise in imports,” said Jennifer McKeown, economist at Capital Economics.

Economists stress that demand is a factor several times more powerful than the exchange rate in determining trade trends.

Domestic demand still weak

Eurostat said household demand and investment subtracted 0.1 percentage point each from the third quarter outcome.

“The continued weakness of consumer spending casts doubt on the recovery’s sustainability,” said McKeown.

Growing unemployment, seen reaching close to 11 percent next year, is likely to keep wage growth and disposable incomes low, putting a further break on household consumption, economists said.

The third quarter growth ends the deepest economic downturn in Europe since World War Two, brought on by a global financial crisis, but another soft patch may be close at hand.

The European Commission expects fourth-quarter growth to slow to 0.2 percent quarter-on-quarter, followed by an expansion of 0.1 percent in each of the first two quarters of 2010.

It sees growth accelerating steadily from the third quarter of 2010 to reach 0.5 percent in the second quarter of 2011.

The data comes as the European Central Bank meets on interest rates amid market expectations it will leave borrowing costs at a record low of 1 percent well into 2010 to ensure recovery takes hold in the absence of inflationary pressure.

But the bank is expected to give more details on plans of a gradual withdrawal of liquidity support to the banking sector.

“On balance, today’s batch of euro zone data serve as a reminder to the ECB to take a cautious approach towards unwinding its emergency liquidity measures,” said van Vliet.