Red ink dries up in two big economies

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 a 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 September 27.

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.

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 Thursday 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. 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, 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.

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.

In an interview with the London Evening Standard, Goldman Sachs economist Jim O'Neill 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."

- INDEPENDENT