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Expect more sluggish growth in eurozone: analysts

New growth figures on Friday should show the eurozone economy continuing only a modest recovery as key problems remain, among them near-record unemployment and the threat of deflation.

BRUSSELS: New growth figures on Friday should show the eurozone economy continuing only a modest recovery as key problems remain, among them near-record unemployment and the threat of deflation.

Recent data has been very mixed, especially after a much weaker-than-expected third quarter, sparking concerns the bloc risked falling back into recession.

That worst fear is unlikely to be realised in Friday's fourth quarter data, analysts said, but the outlook remains fragile and the growth report will be very closely scrutinised for any sign of weakness.

Capital Economics said it expected "modest quarterly rises" in Germany, France and Italy, the eurozone's top three economies, which implies fourth quarter growth of "about 0.2 per cent" for the bloc as a whole.

"While this would be the third consecutive quarter of growth, it would suggest that the economy is not yet growing fast enough to reduce the amount of spare capacity," the analysts said in a note.

Howard Archer of IHS Global Insight expects "growth picked up modestly to 0.2-0.3 per cent" in the three months to December, based on recent data.

The eurozone economy finally broke a record 18-month recession in the second quarter last year with growth of 0.3 per cent but this slowed to just 0.1 per cent in the third, sparking fears the recovery was stalling.

Among evidence pointing to a stronger finish to 2013, the German government hiked its 2014 growth forecast sharply.

"The German economy has moved into a stable and broad-based recovery," Economy Minister Sigmar Gabriel said.

On the negative side, December industrial output in the currency bloc fell a larger-than-expected 0.7 per cent while eurozone unemployment remained at a near-record high 12 per cent in the same month.

More worrying still, eurozone inflation fell to 0.8 per cent in December -- and continued to slip in January, at 0.7 per cent.

This signals that consumer demand, the main economic driver, is weakening, with some analysts worried deflation could be the next step.

Significantly, eurozone December retail sales were down a sharp 1.6 per cent from November when they rose 0.9 per cent.

Amid the deflationary clouds, the European Central Bank cut its already record low interest rates by another 25 points in November to stimulate demand and has since said it is ready to take further action.

If consumers believe prices will fall, they delay purchases to get them cheaper later, but this set off a vicious circle -- companies postpone investment, which in turn hits jobs, wages and finally, demand again.

International Monetary Fund head Christine Lagarde recently warned deflation had to be taken seriously.

"With inflation running below many central banks' targets, we see rising risks of deflation, which could prove disastrous for the recovery," Lagarde said, warning against over-hasty withdrawal of stimulus programmes.

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