Aug. 14 (Bloomberg) -- European economic growth slowed more than economists expected in the second quarter as a rebound in consumer spending failed to make up for weakness in manufacturing and construction.

The economy of the 13 nations that share the euro expanded 0.3 percent from the first quarter, when it grew 0.7 percent, the European Union's statistics office in Luxembourg said today. The growth is the slowest since the fourth quarter 2004. From a year earlier, the economy expanded 2.5 percent.

The euro's 7 percent gain against the dollar in the last year has eroded export competitiveness and higher oil prices increased costs for companies and consumers. While record-low unemployment may lead to more consumer spending, confidence may be hurt by further turmoil in financial markets.

``It confirms what we've thought, that from the spring onwards and into the second half, we see the economy losing some momentum,'' said Kenneth Wattret, an economist at BNP Paribas in London. ``Most business surveys still suggest growth, but the economy is slowly decelerating.''

The second-quarter growth was slower than the 0.5 percent median forecast of 32 economists surveyed by Bloomberg News. The statistics office, Eurostat, will publish a breakdown of the gross-domestic-product data on Sept. 3.

The European Central Bank forecasts the economy will expand about 2.6 percent this year, close to the 2.7 percent recorded in 2006, which was the fastest in six years.

Germany, France

Growth in Germany, the region's largest economy, slowed to a weaker-than-expected 0.3 percent in the second quarter from 0.5 percent in the previous three months, the country's statistics office said today. Growth was curbed by a slowdown in construction after a first-quarter surge during the mildest winter on record.

France's economy, the second-biggest in the euro area, unexpectedly slowed in the second quarter, while expansion in Italy and Spain also was less than economists had expected.

The growth is ``disappointing, but it's just a blip, because a construction slowdown had a significant impact,'' said Aurelio Maccario, an economist at Unicredit MIB in Milan. ``Domestic demand remains in good shape and that keeps the outlook rosy.''

Commission Forecasts

The European Commission today predicted that the euro-area economy will expand 0.6 percent this quarter before growth eases to 0.5 percent in the final three months of the year. The commission presented the forecasts as ranges built around a mid- point. It predicted growth of 0.3 percent to 0.8 percent in the third quarter and 0.2 percent to 0.8 percent in the fourth, lowering the bottom end of the range for both quarters from its last forecasts in July. It projects growth of 0.2 percent to 0.9 percent in the first quarter of 2008.

Europe's manufacturing industries grew at the slowest pace in 17 months in July, while confidence among executives and consumers fell more than economists forecast. In contrast, services growth was the fastest in a year as unemployment fell to 6.9 percent, the lowest since data collection started in 1993.

Industrial production declined 0.1 percent in June from the previous month and was up 2.3 percent from a year earlier, according to a separate report today.

As manufacturers struggle with higher interest rates and oil prices, as well as the euro's strength, sentiment would be further eroded by any broadening of the credit squeeze prompted by U.S. subprime mortgage defaults.

Central Banks

The ECB, the U.S. Federal Reserve and other central banks injected $290 billion into money markets on Aug. 9 and Aug. 10. While the ECB added another $65 billion yesterday, it said that ``money-market conditions are normalizing and that the supply of aggregate liquidity is ample.'' The Fed, the Bank of Japan and Australia's central bank resumed normal refinancing operations and refrained from providing extra funds yesterday.

The subprime crisis hasn't had ``any immediate impact'' on companies, said John Beggs, chief economist at Allied Irish Banks Plc in Dublin. ``What it might do, however, is make them feel a little less confident about investing.''

ECB President Jean-Claude Trichet on Aug. 2 signaled the central bank will lift its benchmark rate by a quarter point to 4.25 percent next month, which would be the ninth increase since late 2005. Investors have pared bets on the ECB lifting its key rate again after September, futures trading shows.

The implied rate on the three-month Euribor contract for December settlement dropped to 4.40 percent today from 4.52 percent on Aug. 8. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's key rate since the currency's start in 1999.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.

Last Updated: August 14, 2007 05:40 EDT