Eurozone economy beats forecasts on 'phenomenal ' German growth

(Update) Eurozone growth came in well ahead of forecasts in the second quarter thanks to a much better-than-expected performance from Germany.

The eurozone reported much higher than expected growth of 1% in the second quarter as German output surged 2.2% but elsewhere the pace of recovery was much slower.

But the news failed to lift markets and an early rally in the euro ran out of steam to trade just 0.13% higher against the dollar at $1.2842.

Investors remain nervous ahead of inflation numbers and more importantly retail sales in the US later today after some disappointing updates from consumer focused US companies yesterday.

Giles Watts, head of equities at City Index, said market sentiment remained negative: 'Investors are responding to any rally by selling whereas a couple of weeks ago they were buying any dip.' 

The FTSE 100 was flat at 5,263 while France's CAC 40 was down 12 points at 3,609. Germany's DAX managed to keep its head above water, up 0.03% at 6,136 points.

Joerg Kraemer, chief economist at Commerzbank, described the growth in Germany as 'phenomenal' and lifted his full-year growth forecast for the country to 3.5% from 2.5%.

Others said that while the European growth was better than many had been expecting, there remained concerns about the outlook for the non-German economies.

Jennifer McKeown, senior European economist at Capital Economics, said the 'recovery still looks worryingly lop-sided' as German grew a massive 2.2% thanks to export growth but France and Italy grew just 0.6% and 0.4%  while the Greek economy shrank 1.5% as austerity measures took their toll and growth in Spain was just 0.2%. 

McKeown said recent surveys suggest that the eurozone’s strong performance might continue into the third quarter but ‘it seems unlikely to last much beyond that.'

In the UK, growth is expected to slow markedly in the second half of this year after a much better than expected growth of 1.1% in the second quarter as government spending cuts take effect in the autumn, weakening consumer demand.