European economic growth accelerated sharply in the second quarter of 2010 as Germany's best performance since reunification more than made up for the struggles of Spain, Ireland and recession-ravaged Greece.
A forecast-beating surge in German gross domestic product combined with a solid if less impressive rise in France to push the aggregate GDP growth rate of the 16-country euro zone to 1.0 percent from the previous quarter and past that of the United States, which is showing signs of flagging.
The fastest growth rate for the currency bloc in more than three years compared with a rise of just 0.2 percent in the first quarter, was above market forecasts and also higher than a comparable U.S. second-quarter increase of about 0.6 percent.
Many economists were surprised by the size of the surge but expect the pace to slow again in the second half of 2010 and beyond, when austerity measures in Germany and several weaker economies could lead to a deceleration, especially if some slowing in China lowers Asian demand for European goods.
Germany's economy minister said the government should continue its 80-billion euros program of cuts to rein in a bloated budget deficit, even though higher growth will boost the government's coffers dramatically.
German GDP rose 2.2 percent quarter-on-quarter, its fastest quarterly rate since the country reunified in the early 1990s following the fall of the Berlin Wall.
The German government had forecast growth of 1.4 percent for the year as a whole. Economists say it is now likely to be three percent or more, something which only moderate expansion in the third and fourth quarters would deliver.
Given signs that global demand is already weakening, German growth will probably slow. A sustained recovery would require a meaningful pick-up in consumer spending, which seems unlikely as Germany's own fiscal consolidation starts next year, Jennifer McKeown of Capital Economics, a London consultancy, said.
Nonetheless, the GDP figures provided investors with much more positive reading than the relentless headlines of debt default risk in Greece and beyond which dented the euro over recent months and even raised questions about the survival of Europe's 11-year-old common currency.
The euro gained ground after the German data.
GERMANY STREETS AHEAD
The most striking element was the extent to which Germany's export-propelled economy distanced itself from the rest of the pack, and not just Greece and other stragglers such as Portugal, Ireland and the medium-sized economy of Spain.
France, which relies more heavily than its neighbor on domestic demand, reported a 0.6 percent increase in the same period, much of the gain coming from internal demand and companies rebuilding their inventories of goods.
Paris has irked Berlin by suggesting it should do more for Europe by boosting domestic consumption, creating a bigger market for exports from other euro zone countries that need an alternative source of growth now the global era of ultra-cheap credit is gone.
Italy, the third-largest economy in the euro zone, last week reported a smaller 0.4 percent rise in GDP for the same period and several of the smaller economies that thrived during the boom years before 2007 are faring far less well, making life hard for a European Central Bank that has to set one interest rate for all in 16 euro currency countries.
In Spain, hard-hit like Ireland by the end of a building boom as well as the end of a global credit bubble, GDP remained weak, with a 0.2 percent rise showing it is struggling to keep its head above water after a first-quarter 0.1 percent GDP rise that just took the country out of recession.
Greece, dependent since May on rescue funding from the rest of the euro zone while it implements a draconian austerity plan, said on Thursday its GDP shrank even harder than expected in the second quarter, with a drop of 1.5 percent.
While European governments can take some comfort from the fact that growth looked better overall during the second quarter of the year, many policymakers fear the quarters ahead will be weaker and more in line with what the ECB predicts will be a moderate and still uneven recovery.
The sovereign debt crisis is not entirely over. Also we see a slowdown in the global industry. Domestic demand in Europe remains weak, with consumer spending slowing down, said Nick Kounis, economist at ABN AMRO.
The Q2 numbers are very impressive, but a slowdown looms ahead for the European economy.
ECB President Jean-Claude Trichet said last week the third and fourth quarters were likely to be significantly less dynamic than what was shaping up to be a really exceptional second quarter, although he conceded that third quarter data so far had proved stronger than expected.
Industrial production dipped in the euro zone as a whole in June suggesting the second quarter finished weaker than it began, but signals remain mixed.
The euro zone Purchasing Managers Index for July, the first month of the third quarter, came in much stronger than expected, with the so-called composite index that combines measures of manufacturing and service sector activity suggesting a healthy expansion rate.
(With report from Reuters bureaux across Europe, editing by Mike Peacock)