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Euro zone may exit from recession yet give little to cheer about

A man talks on his cell phone outside a Movistar store as people walk past in Madrid February 28, 2013. REUTERS/Susana Vera
A man talks on his cell phone outside a Movistar store as people walk past in Madrid February 28, 2013. REUTERS/Susana Vera

By Martin Santa

BRUSSELS (Reuters) - The euro zone economy may learn later on Wednesday that it has moved out of its longest recession, needing seven quarters to dig up modest growth in the three months to June.

Data is expected to show growth in the quarter - but just 0.2 percent, according to economists polled by Reuters. In the first quarter it shrank by that amount.

The overall picture is expected to be mixed. Peripheral countries, such as Spain, Greece and Portugal are struggling with high double-digit unemployment, on-and-off political rows and painful austerity.

By contrast, the bloc's largest economy, Germany, is expected to have gathered speed.

France, the bloc's second-largest economy, and Germany release second-quarter data early. They will be followed by overall euro zone figures at 0900 GMT.

The Reuters poll, published on Tuesday, suggested that despite the quarter's likely growth the bloc is not likely to start growing again at a healthy rate before 2015. Growth was seen unlikely to exceed 0.4 percent in any quarter from now until 2015.

There have been signs of improvement.

Euro zone industrial production rose in April and June, construction output picked up after a weak first quarter hit by bad weather and joblessness fell for the first time in more than two years in June.

"I suspect there was likely a modest overall pick-up in consumer spending, given improved confidence, moderate inflation and slowing job losses," said Howard Archer, chief European economist at IHS.

"Business investment also likely fell at a reduced rate given improved business confidence and the fact that it has fallen markedly for an extended period," he added.

The European Central Bank is keeping interest rates at record lows and had said it will keep them down for an extended period of time to assist the fragile recovery.

"The recent upturn appears mainly to be down to firms expecting demand to rise in the future, rather than a pick-up in orders," said Ben May, European economist at Capital Economics.

"Given this, and the fact that the industrial surveys still only point to small rises in production at best, the pace of expansion may soon ease," he added.

UNEVEN, BUMPY RECOVERY AHEAD

German analysts and investors sentiment climbed more than expected in August suggesting the German economy is gradually regaining momentum after suffering a contraction in late 2012 and a weak start to 2013.

Industrial production in June showed its strongest expansion in almost two years, orders and exports are surging and German unemployment is falling and is one of the two lowest rates in the bloc.

But look south and there is a different picture.

The International Monetary Fund (IMF) said earlier this month that Madrid's reform progress, fiscal consolidation and crackdown on external imbalances were bearing fruits, but urgent action was needed to create jobs and stimulate growth.

The scope and form of the austerity drive in the European Union is now changing. Policymakers still say adjustments in excessive deficits and high debt are essential. But they now emphasize that any action taken must not choke growth and must help create jobs.

ECB President Mario Draghi said earlier this month that labor market conditions remained weak, though he expected the bloc's growth to benefit from a gradual recovery in global demand.

"Overall, euro area economic activity should stabilize and recover at a slow pace. The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said after the ECB rate meeting on August 1.

(Editing by Jeremy Gaunt)

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