The euro zone economy all but stagnated in the third quarter with France’s recovery fizzling out and slower expansion in Germany.

The €9.5 trillion economy pulled out of its longest recession in the previous quarter, but record high unemployment, lack of consumer and market confidence continue to choke a more solid rebound.

In the three months to September, the combined economy of the 17 countries sharing the euro grew by a slower than expected 0.1 per cent. In the previous quarter it rose 0.3 per cent - the first expansion in 18 months.

The euro fell to a session low in reaction to today’s news.

The French economy contracted by 0.1 per cent, snuffing out signs of revival from robust growth in the previous three months. It had been expected to post quarterly growth of 0.1 per cent and has now shrunk in three of the last four quarters.

German growth slowed to 0.3 per cent, from a robust 0.7 in the second quarter, but Europe’s largest economy clearly remains in much better shape and its performance matched forecasts.

France is becoming a focus for concern within the currency area. The Bank of France predicts the economy will expand by 0.4 per cent in the last quarter of the year but the government’s labour and pension reforms are widely viewed as too timid.

“It was particularly disappointing to see France suffer a renewed dip of 0.1 per cent quarter-on-quarter in GDP which highlights concern about its underlying competitiveness,” Howard Archer, an economist with IHS Global Insight, said.

A report on French competitiveness by the Paris-based Organisation for Economic Cooperation and Development warned that it is falling behind southern European countries that have cut labour costs and become leaner and meaner.

“To reduce the economic lag and lost time, France needs to keep up structural reforms,” OECD chief Angel Gurria said.

The report will be hard for the government to ignore since it was commissioned by president Francois Hollande.

German growth was fuelled by domestic demand. Exports faltered, another indication of the malaise gripping the rest of the euro zone.

“Positive impulses came exclusively from inside Germany,” said the German Statistics Office.

The European Commission forecasts the currency area will shrink by 0.4 per cent over 2013 as a whole before growing by a modest 1.1 per cent in 2014. It sees expansion accelerating to 1.7 per cent in 2015.

However, with unemployment in the region running above 12 per cent and one in two young people out of work in Greece and Spain, talk of recovery rings hollow.

Compounding the French gloom, private sector payroll data showed some 17,000 jobs were destroyed in the third quarter, while inflation slowed in October to 0.7 per cent, the weakest level in four years, when France was emerging from a deep recession.

Italy matched France’s performance, shrinking by 0.1 per cent. The Netherlands eked out 0.1 per cent growth.

A senior Italian official told Reuters this week that the euro zone’s third largest economy would return to growth in the last three months of the year, expanding by as much as 0.5 per cent and ending nine quarters of slippage.

The government is forecasting growth of 1.1 per cent next year but most analysts are less upbeat. The median forecast of economists polled by Reuters pointed to 2014 growth of just 0.5 per cent.

Spain reported last month that it had pulled clear of recession in the third quarter, albeit with quarterly growth of just 0.1 per cent, putting an end to a recession stretching back to early 2011.

Portugal is still struggling with austerity as part of its bailout plan yet managed to grow by 0.2 per cent in the third quarter following stunning 1.1 percent expansion in the seocnd quarter. Unlike other embattled euro zone states, unemployment has started to fall there too.

Doubts about an unsteady Italian coalition government’s ability to push through economic reforms remain a major concern for the euro zone, but France is climbing the worry list fast. Both Spain and Portugal have had the outlook on their credit ratings raised to stable in recent days while Standard & Poor’s cut France’s rating to AA from AA+, still well above its Iberian neighbours but narrowing the gap. (Reuters)