Powerful performances by the German and French economies propelled growth in the euro zone well above forecasts in the first quarter while also highlighting the yawning gap between the region's strong and weak.
The 17-nation currency area expanded by 0.8 per cent in the first three months of the year, data showed, fuelled by startling 1.5 per cent GDP growth in Germany, while the French economy grew 1.0 per cent, driven in part by consumer demand.
Economists had forecast euro zone growth of 0.6 per cent. Analysts said the better than expected data - despite Portugal returning to recession and Greece still buried under a debt mountain - strengthened the case for a European Central Bank rate rise by July, which would be the second this year.
Germany and France account for nearly half the region's gross domestic product. Both nations bounced back from a modest showing in the last quarter of 2010 when bad weather hit output.
Both nations bounced back from a modest showing in the last quarter of 2010 when bad weather hit output.
"Those are fantastic figures yet again," Christian Schulz at Berenberg Bank said of Germany's numbers. "Investments look to have given a boost to the economy. Consumption will however become more and more the engine of growth in the future, since unemployment is dropping (markedly)."
Analysts were a little more downbeat about France, saying this was probably its high water mark, with government cuts about to bite.
"This is likely as good as it gets, as we expect growth to slow down to more moderate rates in coming quarters," said Joost Beaumont, economist at ABN-AMRO. "The recent surge in oil prices is likely to erode household purchasing power, while also eating into company profits, leaving its mark on consumption and investment."
Italy bucked the trend, growing by just 0.1 per cent in the first quarter, below expectations and posting the same weak growth rate as the last three months of 2010. The government predicts growth of just 1.1 per cent this year.
Germany looks set to continue riding high, however.
A top economic advisor to the government, Wolfgang Franz, told German TV channel ARD the country's economy could expand by 3 per cent or more this year, well above what is normally regarded as a trend rate.
Debt-ridden members of the euro zone can only dream of hitting even France's level of growth.
Portugal's economy shrank 0.7 per cent in the first quarter, sending the economy back into recession. Its government has admitted that, having sought a bailout, its economy will shrink both this year and next. The Commission expects 2.2 per cent contraction in 2011 and 1.8 per cent in 2012.
Greece actually achieved quarterly growth - of 0.8 per cent - for the first time since late 2009 but that followed a vicious 2.8 per cent contraction in the last quarter of 2010.
The Commission expects Athens to announce new austerity measures this year to meet its bailout targets. It forecast the economy would shrink 3.5 percent this year if policies are unchanged, but expects 1.1 percent growth in 2012.
But Spain, seeking to persuade markets its prospects are rosier than other parts of the euro zone periphery, saw its economy expand by 0.8 per cent on an annual basis, its strongest growth since the second quarter of 2008.
Austria also put in a strong performance; its growth accelerated to 1.0 per cent in the first quarter from an upwardly revised 0.9 per cent in the fourth quarter thanks to booming exports, economic research institute WIFO said.
The split nature of Europe's economies demonstrates the difficulties facing the European Central Bank, which raised interest rates for the first time in two years last month, and is expected to repeat the policy dose soon. The International Monetary Fund said yesterday that the debt crisis could yet spread to core nations in the single currency area.
Its latest report on Europe called for "unrelenting" reform efforts from periphery states, said the Fund was ready to give Greece more aid if the country needed it and urged the ECB to take a cautious approach to interest rate increases, adding the tactic of providing limit-free liquidity to euro zone banks might need to be prolonged.
But with euro zone inflation at the highest since the financial crisis sent the economy into a tailspin in late 2008, financial markets expect the bank to look past the debt crisis and raise interest rates again to 1.5 per cent in July and a third time before the end of the year.
Reuters
