Euro area economy contracted only 0.1% in Q2

The recession in the 16 countries that use the euro eased substantially between April and June after unexpected growth in Germany and France, the currency bloc's two largest economies, official figures showed Thursday.

Euro zone gross domestic product fell by only 0.1% in the second quarter from the previous three month period, the European Union's statistical agency Eurostat said.

That was the fifth straight quarterly decline, but the drop was much less than expected and provides the clearest evidence so far that the worst of the recession is over.

France's Finance Minister Christine Lagarde said a government-backed stimulus plan for the auto industry helped the country weather the storm and return to growth.

"France is finally coming out of the red," she said.

Still, the euro zone economy is consolidating itself at a far lower level than when the troubles began, and Europe still faces the prospect of rising unemployment and worries about what happens after the expiration of government spending programs to prop up auto sales. The economy shrank 4.6% from the same quarter a year ago.

"This much better than expected figure testifies that we are now very close to the bottom of the cycle, marking the end of the recession and the start of the recovery, but the pace of the recovery would prove to be tepid as the fundamentals will remain frail for a while," said Isabelle Job, head of macro research at Calyon Credit Agricole.

The news that Germany and France pulled out of recession by growing 0.3% in the second quarter prompted many economists to hastily revise their forecasts ahead of the Eurostat release — before the French and German data, the expectation was for a 0.5% quarterly decline.

In fact, the figures will likely surprise policymakers at the European Central Bank. As recently as last week, the central bank's president Jean-Claude Trichet said the recession would likely continue until next year at least.

The better than expected performance helped the euro bounce half a percentage point to $1.4270.

The second-quarter easing represents a marked improvement on the record 2.5% contraction recorded in the first quarter and may stoke market hopes that the euro zone could actually start recovering in the second half of the year if global demand picks up.

It was also better than the 0.3% quarterly decline recorded in the U.S., the world's single largest economy.

On an annual basis, though, Eurostat said the euro zone had shrank more than the U.S. Euro zone GDP was down 4.6%, better than the 4.9% drop recorded in the second quarter but worse than the 3.9% posted in the U.S.

Much will depend on what happens in the currency markets over the coming months. Europe's manufacturers will not be pleased that the euro has risen above $1.40 after having fallen toward $1.25 earlier in the year — a higher euro makes euro zone products more expensive in export markets.

The signs so far are that exporters in Germany, the euro zone's biggest single economy, have managed to offset the impact of the higher euro amid rising global demand. Government figures last week showed that German exports were up 7% in June, their biggest monthly rise in nearly three years.

Other countries may not be as capable as Germany at offsetting the negative euro impact, analysts cautioned.

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