World Economy

Germany Escapes Recession, Italy Contracts Further

Germany Escapes Recession,  Italy Contracts FurtherGermany Escapes Recession,  Italy Contracts Further

Investors breathed a sigh of relief on Friday, as data revealed that Germany narrowly missed falling into recession in the third quarter, although Italy's economy contracted once again.

Germany's gross domestic product (GDP) expanded by 0.1 percent in the third quarter on the previous three months, meeting expectations, after contracting in the second quarter. It follows heightened concerns that the eurozone's largest economy could be heading into a recession, CNBC reported.

Italy remained in recession in the third quarter, however, with its economy shrinking by 0.1 percent, after unexpectedly slipping back into recession in the second quarter.

Eurozone-wide GDP – due at 10 a.m. GMT – are likely to get a slight boost from forecast-beating figures for France, however. Its economy grew more than expected in the third quarter, marking a return to growth for the struggling eurozone nation.

French gross domestic product (GDP) expanded by 0.3 percent quarter on quarter, above forecasts of 0.2 percent. It comes after the economy stagnated in the first quarter of the year, and contracted in the second, leading it to be dubbed the "sick man of Europe".

Structural Problems

Steven Bell, director of global macro at F&C, said the figure was a relief, but that structural problems in France – such as high taxes and a rigid labor market – remained.

"All of these numbers begin with a zero," he told CNBC on Friday. "It's a relief, but they're inching-ahead numbers from the French economy."

In the second quarter of 2013, the 18-country bloc that uses the euro managed to post positive growth for the first time since 2011. However, the road since has been uneven and rocky with diminishing demand plaguing the region alongside geopolitical concerns with tensions in the eastern part of Ukraine.

Analysts expect eurozone GDP to edge higher by just 0.1 percent from the quarter before, after a flat figure for the previous period.

When it comes to struggling Italy, Partito Democratico, MP and economic adviser to Prime Minister Matteo Renzi, said labor market reforms and "massive" tax reductions would help the bolster the economy.

"If Italy keeps doing the structural reforms, reducing costs, reducing taxes, reforming the labor market, reforming the institutional mechanisms so that we can get the political decision making faster and more effective, Italy will recover and will reclaim the place it should have in Europe and the world economy," he told CNBC on Friday.

"Politically Italy is in a very different place as it had been for many years. There is a real desire for change within the country."

Star Performer

ABN Amro economist Nick Kounis is predicting that the eurozone expanded 0.2% based on the figures so far. Spain looks to have been the star performer in the eurozone this quarter, having reported 0.5% growth.

French growth was driven mainly by government spending, up 0.8%, while household spending rose just 0.2% and trade made a negative contribution. Economists were not impressed that the flat performance in the second quarter was revised away to show a 0.1% contraction.

France’s finance minister Michel Sapin noted growth of 0.3% isn’t enough to fix the country’s jobs crisis: “Economic activity has picked up slightly but remains too weak to ensure the job creation our country needs.”

Business investment fell in both Germany and France, suggesting firms may have been spooked by the poor economic outlook and the Ukraine crisis.