Euro zone growing at fastest rate in two years

A slowdown in Germany weighed on the euro zone in the first quarter, but the bloc’s economy still grew at its fastest in almost two years as cheap food and fuel boosted spending and a central bank stimulus programme kicked in.

Gross domestic product in the 19 countries sharing the euro rose 0.4 per cent quarter-on-quarter for a 1.0 per cent year-on-year rise - just below forecasts in a Reuters poll of economists.

European Union statistics office Eurostat gave no detailed breakdown with Wednesday's data, while economists said growth was likely to have been helped by lower food and energy prices, a weak euro and the asset-buying programme the European Central Bank started in early March.

“It is evident that improved growth was due to strengthened domestic demand. Domestic demand was certainly behind the improved growth in France and Italy, and it also reportedly held up reasonably well in Germany,” said Howard Archer, economist at IHS Global Insight.

Germany disappoints, Germany Outperforms

Overall, however, growth in Europe’s largest, and traditionally export-led, economy Germany slowed more than expected as imports rose more sharply than sales abroad. That net drag from trade activity was replicated across the bloc as muted global growth curbed export growth despite a weaker euro, Archer said.

Germany’s GDP grew 0.3 per cent on the quarter, down from 0.7 per cent in the previous three months and undershooting a consensus forecast of 0.5 percent in a Reuters poll.

“Weak global trade is hitting German industry ... and if the consumers start refraining from spending too, overall economic growth will decline rapidly,” said Thomas Gitzel, chief economist at VP Bank. The growth rate was half that of neighbouring France, the bloc’s No.2 economy, which expanded by 0.6 percent, its strongest rate in two years, boosted by a 0.8 percent rise in consumer spending. Finance Minister Michel Sapin said the French economy would now grow faster than the 1 percent the government had forecast for 2015. Archer said it was likely that consumer spending was a significant growth driver across the region and that investment strengthened in a number of countries, helped by improved business confidence. Higher inventories were also likely to have contributed to growth.

Steady acceleration

Quarterly growth in the euro zone was the strongest since the second quarter of 2013 and marked a steady acceleration over the growth rates of 2014. Marco Valli, chief euro zone economist at UniCredit, said the same pace of growth should be maintained in the current quarter as waning support from oil prices should be compensated by a stronger impact from the weak euro.

“We think the euro zone has reached cruising speed of 1.5-2.0 per cent annualised (growth), with favourable developments in oil prices and the exchange rate more than offsetting ongoing weakness in global trade,” he said.

Economists said the faster euro zone growth and an end to a run of negative inflation numbers in April were unlikely to stop the ECB’s money printing programme. The central bank, which aims to lift euro zone inflation expectations back to its target rate of just below 2 per cent, has repeatedly said it has no plans to end the quantitative easing scheme before its scheduled conclusion in September 2016. The euro zone’s third biggest economy Italy grew 0.3 per cent quarter on quarter, slightly more than expected thanks to a pick-up in domestic demand, fuelling hopes of a recovery this year after three years of recession.

Reuters