Part of the optimism regarding the economic outlook is based upon the robust growth — to date — in the rest of the world (see this post on the subject). The Euro zone looks like it’s in for some slower growth, though.

From yesterday’s FT (note: growth rates reported below not annualized):

Eurozone economic recovery faltering

By Ralph Atkins inFrankfurt andBertrand Benoit in Berlin

Published: August 15 2007 03:00 | Last updated: August 15 2007 03:00

The eurozone’s economic recovery has lost significant momentum according to weaker-than-expected growth figures released yesterday.

The unexpectedly sharp slowdown, shown in gross domestic product figures for the three months to June, suggests that the best days of the upturn are over.

The 13-country economy expanded by just 0.3 per cent, leaving it again dragging behind the US. Eurozone GDP had expandedby 0.9 per cent and 0.7 per cent in the previous two quarters.

Despite the latest figures, the European Central Bank is likely to press ahead with another quarter-point rise in its main interest rate to 4.25 per cent in September.

Axel Weber, president of Germany’s Bundesbank and influential ECB governing council member, said European and German data pointed to “a continuation of the robust and broad-based economic upturn” – suggesting central bankers did not see the recovery as having been blown off course.

But analysts said the deceleration in eurozone growth had made less likely further rises in borrowing costs beyond next month’s expected increase.

Since late 2005, the ECB has increased its interest rates eight times by a quarter point amid mounting inflationary worries.

In 2006 eurozone growth rebounded dramatically to a six-year high and at the start of 2007 was comfortably outpacing that of the US. In another sign of improvement eurozone unemployment has steadily fallen to a record low.

Analysts said growth could still pick up again in the third quarter with business confidence remaining high and little macroeconomic impact expected from recent financial market turmoil.

But higher ECB interest rates, and weaker US demand for European goods and services are likely to have hit the eurozone. The latest data pointed to weaker construction activity, which had been strong at the start of the year. In coming months, cooling housing markets could curb consumer spending.

The retrenchment has been particularly abrupt in Germany, which sustained a three-percentage-point rise in value added tax at the start of the year. “We are in a transition period from a boom – with year-on-year growth rates of nearly 4 per cent – to a more normal upswing,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.

Germany’s economy, the eurozone’s largest, expanded by just 0.3 per cent in the second quarter, after 0.5 per cent in the previous three months. Growth was largely driven by exports, withGermany’s statistical office reporting that foreign trade was “highly dynamic”.

However, France and Italy disappointed too. French GDP rose by just 0.3 per cent in the second quarter, after 0.5 per cent previously, putting the country on course to be among the eurozone’s worst performers this year.

That could encourage fresh spats between French President Nicolas Sarkozy and his compatriot, Jean-Claude Trichet, ECB president.

Mr Sarkozy believes the ECB is not doing enough to support growth.

Italian GDP expanded by just 0.1 per cent in the second quarter, after 0.3 per cent in the previous quarter.

The eurozone slowdown yesterday led to calls for structural reform efforts to be stepped up. Juergen Thumann, chairman of Germany’s BDI industrial federation, said: “Economic cycles are not a thing of the past. The strong and resilient recovery we are experiencing at present will come to an end too.”

Germany’s exporters and wholesalers federation said that confidence, although still higher than two years ago, had peaked earlier this year and was now weakening.

This performance was recorded before credit markets seized up. Presumably higher risk aversion and greater uncertainty regarding U.S. and hence world growth prospects will mean greater — rather than less — drag on future Euro zone growth.

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