PARIS - The euro zone shook off recession in the third quarter although the largely government-engineered rebound after more than a year of shrinkage fell a little short of forecast, official estimates showed on Friday.

Economists said the comeback appeared to be mostly driven by exports and that part of that was surely due to car sales lifted by scrappage subsidies, leaving open the question of whether the recovery can become self-sustaining.

EU statistics office Eurostat said the aggregate GDP of the euro zone and 27-country European Union of which it is part, both turned positive in the third quarter -- with growth of 0.4 and 0.2 percent respectively.

That was a touch short of the 0.5 percent quarter-on-quarter rise expected for the euro zone in a Reuters poll, partly due to the fact that French growth was half as strong as anticipated, at 0.3 percent quarter-on-quarter.

Germany, which like France shook off recession in the second quarter, posted growth of 0.7 percent for the three months to end-September versus the prior quarter.

Italian gross domestic product turned positive, with a rise of 0.6 percent quarter over quarter, following five quarters of shrinkage.

The euro zone has officially turned the corner and that is cause for relief, not celebration, said Martin van Vliet, an economist at ING who stressed investment and consumer spending needed to pick up to make the recovery sustainable.

The euro zone's worst post-war recession may be officially over, but unfortunately for many people and businesses it will continue to feel like a recession for some time to come.

The positive third-quarter figure for euro zone GDP followed a drop of 0.2 percent in the second quarter and ended five consecutive quarters of contraction as Europe succumbed to the same fate as the rest of the industrialised world.
UniCredit chief economist Marco Annunziata said the strength of the euro's exchange rate was another danger the area remained ill-equipped to deal with as a rebound in global trade gains traction, and that there were still plenty of reasons to worry.

NOT ALL EQUAL

Some countries continued to struggle with recession in the third quarter, including Spain and Greece, and beyond the euro currency fold, Britain.

Economists noted that exports seemed to be the main driver of recovery, along with the fact that companies are no longer running down warehouse stocks, or inventories, so frantically.

Even a slowdown in such destocking tends to mechanically lift GDP as companies are obliged to produce more goods and economists said this could provide further support.

But what ultimately counts is whether investment picks up and consumption strengthens as long as unemployment is still on the rise.

The only common thread is a depressing one: household consumption remains dormant across the euro area, UniCredit's Annunziata said.

UPHILL ACCELERATION

Euro zone GDP is forecast by the European Commission to have shrunk a record 4 percent in 2009, with most of that plunge in the first half of the year, before signs emerged of a stabilisation in global trade and destocking by companies.
The Commission on November 3 marginally raised its forecast for GDP in 2010 to 0.7 percent and predicted an acceleration to 1.5 percent in 2011 but said there could be another soft patch in the first half of 2010.

The challenge policymakers face now is deciding when to end the fiscal and monetary stimulus credited with averting a steeper slump and limiting the cumulative loss of GDP to five percentage points in the EU since GDP started falling in the second quarter of 2008.

That, the Commission says, is three times as big as average output losses in three previous recessions since the 1970s.

Howard Archer, economist at Global Insight, also forecast a temporary loss of growth momentum during 2010.

This loss of momentum is expected to be the consequence of the withdrawal of some stimulus measures, including car scrappage schemes and employment support measures, he said.

International Monetary Fund chief Dominique Strauss-Kahn, visiting Singapore, said he did not believe there would be a so-called double-dip recession where the current upturn proves short-lived and morphs rapidly into another downturn.

Our forecast has that, not only in the United States but also the rest of the world, 2010 will be a year of recovery, he said.

While the largest mainland economies of Europe are growing again, Britain, Ireland, Spain and others have yet to do so even if there is evidence that the worst of the crisis has passed.

Spain on Thursday reported a third-quarter GDP drop of 0.3 percent, versus a second quarter where the contraction was a far heftier 1.1 percent.
Beyond the euro currency area, Britain reported its sixth straight quarter of shrinkage in the third-quarter, when GDP fell 0.4 percent versus the previous one.

(With reporting by Reuters bureaux across Europe)

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