Analysts: Expect More Sluggish Growth in Eurozone

New growth figures on Friday should show the eurozone economy continuing only a modest recovery as key problems remain, among them near-record unemployment and the threat of deflation.

Recent data has been very mixed, especially after a much weaker-than-expected third quarter, sparking concerns the bloc risked falling back into recession.

That worst fear is unlikely to be realized in Friday's fourth-quarter data, analysts said, but the outlook remains fragile and the growth report will be very closely scrutinized for any sign of weakness.

National data released before the 1000 GMT announcement of the eurozone figures showed the German economy, Europe's biggest, growing 0.4 percent in the October-December period, slightly better than analyst forecasts for 0.3 percent.

In contrast, the French economy grew 0.3 percent in the fourth quarter, falling short of official forecasts for 0.4 percent while Italy managed 0.1 percent.

Capital Economics said that based on these early figures, it now expected fourth quarter eurozone growth of 0.3 percent, above the consensus view of 0.2 percent.

That would sill leave the eurozone economy in negative territory for the year with a contraction of 0.4 percent, only slightly better than the 0.6 percent drop in 2012, it said.

Howard Archer of IHS Global Insight expects "growth picked up modestly to 0.2-0.3 percent" in the three months to December, based on recent data.

The eurozone economy finally broke a record 18-month recession in the second quarter last year with growth of 0.3 percent but this slowed to just 0.1 percent in the third, sparking fears the recovery was stalling.

Among evidence pointing to a stronger finish to 2013, the German government hiked its 2014 growth forecast sharply earlier this week as did non-euro Britain's central bank.

"The German economy has moved into a stable and broad-based recovery," Economy Minister Sigmar Gabriel said.

On the negative side, December industrial output in the currency bloc fell a larger-than-expected 0.7 percent while eurozone unemployment remained at a near-record high 12 percent in the same month.

More worrying still, eurozone inflation fell to 0.8 percent in December -- and continued to slip in January, at 0.7 percent.

This signals that consumer demand, the main economic driver, is weakening, with some analysts worried deflation could be the next step.

Significantly, eurozone December retail sales were down a sharp 1.6 percent from November when they rose 0.9 percent.

Amid the deflationary clouds, the European Central Bank cut its already record low interest rates by another 25 points in November to stimulate demand and has since said it is ready to take further action.

If consumers believe prices will fall, they delay purchases to get them cheaper later, but this sets off a vicious circle -- companies postpone investment, which in turn hits jobs, wages and finally, demand again.

International Monetary Fund head Christine Lagarde recently warned deflation had to be taken seriously.

"With inflation running below many central banks' targets, we see rising risks of deflation, which could prove disastrous for the recovery," Lagarde said, warning against over-hasty withdrawal of stimulus programs.