PARIS, Feb 12 - Growth prospects for the euro zone are looking up this year after a dismal economic performance in 2003 but policy makers are still worried that recovery could be derailed by the euro's strength in currency markets. Official data on Thursday showed German gross domestic product (GDP) grew by a smaller-than-expected 0.2 percent in the last quarter of 2003. But the overall result for the full year was confirmed as a contraction of 0.1 percent. France, too, reported a below-expectations fourth quarter increase of 0.5 percent, leaving its economy with a 0.2 percent increase for the year as a whole, its poorest performance in a decade.
Figures for Italy and the euro zone will follow on Friday at 0930 and 1100 GMT respectively. According to a poll, the euro zone data are likely to show growth of 0.4 percent for the fourth quarter, the same as the previous three months. Despite the lacklustre end to 2003, the European Central Bank repeated its message on Thursday that all economic signs pointed to recovery in the 12-nation euro zone while inflation would ease. "Inflationary risks should be contained by somewhat more favourable import price developments, while the economic recovery in the euro area should proceed in line with previous expectations," the ECB said in its February monthly bulletin. The ECB has forecast euro zone growth of 1.6 percent this year and 2.4 percent next year after an estimated 0.4 percent for 2003.
In France, the euro zone's second biggest economy after Germany, cabinet spokesman Jean-Francois Cope said growth this year should surpass the government's forecast of 1.7 percent. "In the full year 2004, we will pass two percent, or even reach 2.5 percent," Cope said on Europe 1 radio.
DEFICIT TROUBLE
In Brussels, the European Commission said France's 2003 growth rate of 0.2 percent, which fell short of a government forecast of 0.5 percent, showed there was a risk of the 2003 budget deficit staying higher than the government is saying. EU Monetary Affairs Commissioner Pedro Solbes said on Tuesday France could miss a target to cut its deficit to within EU limits by 2005. Paris is already set to bust the limits for a third year running in 2004. Economists were sanguine about the growth outlook for France. They said the growth of 0.5 percent in the final quarter of 2003, though below a consensus forecast for 0.6 percent, was still respectable and better than Germany achieved.
"Indicators are still fragile but we are optimistic for 2004," said Nicolas Claquin at CCF bank. Laure Maillard, an economist at Caisse des Depots, warned of risks to the upturn. "The outlook for recovery is not without pitfalls," Maillard said. "The main one is the appreciation of the euro, which is hampering the competitivity of European firms and forcing them to adjust in order to make their exports more attractive." The dollar was trading not far above an all-time low of about $1.29 in Europe on Thursday after remarks from U.S. Federal Reserve chief Alan Greenspan that financial markets took as a signal that there would be no rise soon in U.S. interest rates.
EURO WORRIES
In Germany, Economy and Labour Minister Wolfgang Clement said the euro-dollar exchange rate should be kept in a "sensible corridor" to ensure growth, and urged Asian economies to play their part. "We cannot have the euro zone alone bearing the burden of the necessary adjustment of the dollar, while the Japanese central bank at least partially compensates pressure on the yen," he told members of the German parliament. Clement welcomed last weekend's statement from the Group of Seven economic powers, who called for change in countries that lacked exchange rate flexibility -- an apparent refence to Asian nations such as China which peg their currencies to the dollar. Despite the G7 statement, which also said that excessive currency swings and disorderly moves were undesirable, the euro has continued to rise, and hit $1.2846 at one stage on Thursday. The damage a strong euro can do was illustrated in financial results from French advertising giant Havas, which said it took a 200-million-euro hit due to the dollar's weakness in 2003.
On Wednesday, two leading German economic think tanks said the strong euro could crimp recovery in Europe's largest economy this year. A stronger euro makes exporters' products more expensive outside the single currency zone. The German fourth quarter figures showed growth was held down by a slowdown in exports, as well as weak consumer demand. Casting doubt over the strength of the recovery early in 2004, data showed car sales in western Europe dipped 1.6 percent in January amid shaky consumer spending in France and Germany. The Bank of France also toned down its assessment of immediate growth prospects, cutting its forecast for growth in the first quarter of 2004 to 0.5 percent from 0.7 percent. Separately, official figures showed the Dutch economy saw its first full-year recession in two decades in 2003, contracting by 0.8 percent, but it was helped by the global recovery to return to slight growth in the fourth quarter.//