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August 14, 2009

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Euro zone posts positive signals

THE recession in the 16 countries that use the euro eased substantially between April and June after unexpected growth in Germany and France, the currency bloc's two largest economies, official figures showed yesterday.

Euro zone gross domestic product fell by only 0.1 percent in the second quarter from the previous three month period, the European Union's statistical agency Eurostat said.

That was the fifth straight quarterly decline, but the drop was much less than expected and provides the clearest evidence so far that the worst of the recession is over.

Still, the economy is consolidating itself at a far lower level than when the troubles began, and Europe still faces the prospect of rising unemployment and worries about what happens after the expiration of government spending programs to prop up auto sales. The economy shrank 4.6 percent from the same quarter a year ago.

"This much better-than-expected figure testifies that we are now very close to the bottom of the cycle, marking the end of the recession and the start of the recovery, but the pace of the recovery would prove to be tepid as the fundamentals will remain frail for a while," said Isabelle Job, head of macro research at Calyon Credit Agricole.

Revised forecasts

The news that Germany and France pulled out of recession by growing 0.3 percent in the second quarter prompted many economists to hastily revise their forecasts ahead of the Eurostat release.

Before the French and German data, the expectation was for a 0.5 percent quarterly decline.

In fact, the figures will likely surprise policy makers at the European Central Bank.

As recently as last week, the central bank's president, Jean-Claude Trichet, said the recession would likely continue until next year at least.

The better-than-expected performance helped the euro bounce half a percentage point to US$1.4270.

The second-quarter easing represents a marked improvement on the record 2.5 percent contraction posted in the first quarter and may stoke market hopes that the euro zone could actually start recovering in the second half of the year if global demand picks up.

It was also better than the 0.3 percent quarterly decline recorded in the United States, the world's largest economy.

Much will depend on what happens in the currency markets over the coming months. Europe's manufacturers will not have been pleased that the euro has risen above US$1.40 after having fallen toward US$1.25 earlier in the year. A higher euro makes euro zone products more expensive in export markets.


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