Buoyant Germany allows euro zone to avoid recession
AN UNEXPECTEDLY robust German economic rebound has allowed the euro zone to escape recession, highlighting diverging fortunes across the region but also the country’s scope for lifting the prospects of weaker rivals.
German gross domestic product expanded 0.5 per cent in the first quarter of the year compared to the previous three months, a much stronger pace of growth than economists had forecast.
As a result, euro zone GDP remained flat – rather than contracting as had been widely expected – despite further falls across much of southern Europe and stagnation in France, the euro zone’s second-largest economy.
Although the euro zone debt crisis could yet deliver an economic “shock”, Germany has emerged from the crises of the past few years as one of the world’s best-performing advanced industrial economies. Unemployment is near record lows since reunification in 1990, while business confidence remains high.
GDP in Europe’s largest economy had contracted 0.2 per cent in the final three months of last year, which largely explained a 0.3 per cent fall in euro zone GDP and raised fears of a technical recession, defined as two quarters of negative growth. But this weakness was only temporary.
Euro zone divergences have complicated the task of the European Central Bank (ECB). Although interest rates are widely seen as too low for Germany, the rest of the bloc is not yet ready for any policy tightening. Jens Weidmann, Bundesbank president, is prepared to tolerate a German inflation rate above the euro zone average – but Germans’ deep-seated worries about inflation trends limit the ECB’s room for manoeuvre.
German politicians, meanwhile, have come under international pressure to use fiscal policy to boost domestic consumer spending as way of further stimulating demand for imports.
Still, with fiscal austerity programmes starting to bite, the euro zone’s economic outlook remains bleak. The latest data are unlikely to dispel worries about the effect of the region’s re-escalating debt crisis or the ramifications of a possible Greek exit. “We haven’t got through the crisis yet – there is a long road ahead of us,” warned Markus Kerber, director of Germany’s BDI industrial association.
Euro zone purchasing managers’ indices have pointed to economic activity weakening further at the start of the second quarter – although the growth figures yesterday suggest they might have overstated the slowdown.
France’s economy saw zero growth in the first quarter, after a modest 0.1 per cent expansion in the final three months of last year. Italy reported a first quarter fall of 0.8 per cent – its third consecutive quarterly contraction. Spain has reported a 0.3 per cent drop.
Among the positive surprises, Portugal’s economy contracted only 0.1 per cent – far less than expected. Beyond the euro zone, the slowdown in several central European countries was sharper than forecast. The US economy expanded 0.5 per cent in the first quarter, but the euro zone outpaced the UK, which saw a 0.2 per cent contraction. – (Copyright The Financial Times Limited 2012)