Spain and France fail to halt eurozone slowdown

The eurozone economy came close to stagnation at the end of last year as Germany and Italy moved to the brink of recession, official figures showed yesterday.

The eurozone economy came close to stagnation at the end of last year as Germany and Italy moved to the brink of recession, official figures showed yesterday.

The 12-nation area posted growth of just 0.2 per cent in the final quarter of 2004, half the pace expected by the markets and the worst out-turn since the middle of 2003. The country breakdown showed that GDP growth was only kept in positive territory thanks to spending booms by Spanish and French consumers.

The German economy contracted by 0.2 per cent, following its zero growth in the previous quarter, putting it close to the technical definition of recession of two quarters of consecutive declines. Italy slowed by 0.3 per cent while Holland and Greece both contracted by 0.1 per cent. In contrast Spain posted 0.8 per cent growth followed by France on 0.7 per cent.

Holger Schmieding, the co-head of European economics at Bank of America, said: "Half the eurozone was contracting in late 2004, while the other half was having a good time, driven to some extent by surging house prices. For the European Central Bank, the current data set probably presents a headache."

Recent pronouncements by senior ECB officials have raised fears of a rise in interest rates. Yesterday Christian Noyer said rates were "accommodative" while on Monday Lucas Papademos said the ECB was ready to act if inflation rose. But analysts said there was a growing conflict between the ECB's rhetoric and the economic data.

Javier Perez de Azpillaga, at Goldman Sachs, said: "The data should clearly reduce any temptation to hike rates soon. The GDP figure will act as a dampener on some ECB members' inclination to start bringing rate back to more neutral levels and make them reassess the solidity of the recovery."

However any impact on the euro was offset by figures showing that net inflows of capital into the US had slowed markedly in December. Net inflows of capital slowed to $61.3bn from $89.3bn in November. The US depends on foreign investors buying assets such as Treasury bonds to finance its current account deficit.

Adam Cole, a senior currency strategist at RBC Capital Markets, said: "The monthly average $66bn for the quarter as a whole is at the low end of the monthly funding requirement of $65 to $75bn to sustain the deficit. Fundamental pressure on the dollar remains downward."

Meanwhile retail sales fell by 0.3 per cent in January while growth in New York State factories slowed.