France and Germany Return to Growth

Hopes of economic recovery in the eurozone received a boost yesterday with news that the two powerhouse economies of the single currency bloc, Germany and France, have returned to growth.

Stronger exports, particularly to the buoyant US, are believed to be the source of expansion that has followed a dismal year in which Germany has seen activity flat or falling for three successive quarters and France saw output decline in two out of three quarters.

Figures released yesterday showed that Germany's economy grew by 0.2% in the third quarter of 2003, but output was still 0.2% lower than in the same quarter of 2002. France posted growth of 0.4%, but gross domestic product was also 0.2% weaker than a year earlier.

Germany's federal statistical office said exports from Europe's biggest economy had grown strongly, helping to off set the continued softness of domestic demand. Figures from France showed a jump in the trade surplus between August and September from €686m (£480m) to €922m.

Some City analysts warned that the recovery could be choked off by the rise in the value of the euro against the dollar, which makes exports from the eurozone more expensive.

However, the data was welcomed by supporters of the euro in the UK, who have found it more difficult to make the case for British membership of the single currency while Germany and France have been struggling.

Philippe Legrain, chief economist of Britain in Europe, said: "The economic recovery in Germany and France, the second and third biggest destinations for British exports, is good news for both the eurozone and Britain. It is powerful evidence that the pessimism about Europe is overdone: far from suffering from inexorable decline, it appears to be on the road to recovery. And as demand recovers, the benefits of the euro to long-term economic growth - increased trade, investment and productivity growth - will become more apparent."

The flipside to export-led growth in France and Germany, however, was a deterioration in the already-huge US trade deficit.

Record imports meant America's shortfall with the rest of the world rose for the first time in six months - from $39.2bn to $41.3bn.

On the currency markets, news of the widening US deficit put downward pressure on the dollar, even though markets shrugged off a small increase in the number of jobless claims in the past week.

Analysts said the increase of 13,000 to 366,000 still suggested the labour market was improving, helping to underpin the prospects of the US economic recovery taking root over the next few months.