Recession over for France and Germany

France and Germany have snapped out of recession unexpectedly early, according to the first estimates of growth released by the European statistics agency.

Both economies grew by 0.3 per cent between April and June, a much better performance than analysts had anticipated and one in stark contrast to the 0.8 per cent contraction seen in Britain. It means that, for now at least, their year-long recession is over.

The news comes just as the German election campaign gets into full swing, with polling day set for 27 September. Chancellor Angela Merkel's Christian Democrats enjoy a 15-point lead over their Social Democrat rivals and the evidence that her economic polices appear to be working may further improve her chances of re-election.

The strong performances in the euro currency zone's two largest economies helped pull the entire region to within a whisker of recovery – economic activity in the eurozone as a whole fell by only 0.1 per cent, dragged lower by the sluggish performances in other large economies such as Italy and the Netherlands. The stabilisation of the European economy comes after a hefty 2.5 per cent drop in output recorded in the first months of this year.

A return to growth in the UK's major trading partner will also help the British economy emerge from recession more vigorously than previously assumed. In any case most observers believe that the British economy may well have begun to grow by now but the evidence for that will have to await the publication of British growth figures for the third quarter, which are due in October. On Wednesday the Governor of the Bank of England, Mervyn King, said: "It is likely output stabilised in the middle of this year, and business surveys and other short-run indicators suggest growth is more likely than not to resume over the next few quarters."

In America the Federal Reserve said earlier this week that the US economy was "levelling out". With the exception of Japan, the world's major economies appear to be either out of recession, or on the brink of some sort of positive growth, however modest.

The French Finance Minister, Christine Lagarde, welcomed the news. "The data is very surprising. After four negative quarters France is coming out of the red," she said. Economists said that French shoppers had proved resilient, and France's relatively large state sector had helped stave off the worst ravages of the recession. Exports are also on the rise, which is partly due to a general revival in global trade. Ms Lagarde said that scrappage incentives in Germany, France's biggest trade partner, had lifted the French motor industry.

Germany's slump had been one of the most severe in the Western world, which was ironic because the country saw little of the credit booms, property bubbles and banking excesses seen elsewhere. However the collapse in world trade hit Germany's exports of manufactured goods hard over the last few months, as retailers cut their stock levels and the Chinese moderated their previously insatiable appetite for German capital goods such as machine tools.

Economists also pointed out that the generally lower level of public and household debt in France and Germany had helped them deal with the downturn more easily than the UK. Hence the German government has been able to finance an extensive system of job subsidies to keep unemployment down, for example.

Colin Ellis, economist at Daiwa Securities, said: "The euro area entered the recession with a better balance sheet position than the US or the UK, with the downturn triggered by a collapse in external demand. Indeed, household spending rose in both Germany and France in the first quarter, in marked contrast to the US and the UK."

Liberal Democrat Treasury spokesman Vince Cable said: "The signs of recovery in France and Germany are to be welcomed, particularly since they are both vital markets for British goods and services. The size of Britain's banking sector and the extent to which the Government allowed debt and the housing bubble to grow left Britain particularly exposed. This was not the case in either France or Germany."

In an interview with the London Evening Standard, Jim O'Neill, chief economist with Goldman Sachs, said: "It is quite clear given what we have seen from Germany and France that things have improved much more quickly than people expected. If [Germany and France] are now recovering this is good news for our exports, because it will mean more orders for our companies."

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