Tags: eurozone | Germany | France | economy

Flagging Eurozone Recovery Turns up Heat on ECB to Act

Thursday, 15 May 2014 11:12 AM EDT

Eurozone growth disappointed in the first quarter, despite a strong showing by economic powerhouse Germany, data showed on Thursday, turning up the heat for another cut in European interest rates.

The German economy, the region's biggest, sprinted ahead in the first quarter of 2014, with growth doubling to 0.8 percent, the strongest quarterly growth for three years and ahead of analysts' expectations.

But the French economy, seen by some economists as the weak link in Europe, turned in zero growth in the same period, highlighting divergence between the eurozone's two biggest economies which is of deep concern to policymakers.

Gross domestic product in Italy, the third-biggest eurozone economy, shrank by 0.1 percent; and in Portugal, about to emerge from a bailout corset, output contracted by 0.7 percent.

Overall the 18 countries that share the euro notched up growth of 0.2 percent in the first three months of this year, far short of analysts' expectations.

"Disappointing eurozone growth adds to the case for ECB action in June," said Berenberg Bank economist Rob Wood.

"The eurozone economy has expanded for four consecutive quarters now, but there was no acceleration in growth in the first quarter. Today's data will raise speculation about ECB action next month," Wood said.

Strong first-quarter GDP growth could have kept the ECB from acting, the analyst said.

"But the growth figures add to likely downward revisions to the central bank's inflation call. We see a 70-percent chance that the ECB will ease policy in June, most likely by cutting interest rates further," he said.

The ECB has held its key interest rate at a current all-time low of 0.25 percent since November.

But the central bank's chief Mario Draghi hinted last week that further easing was in the cards next month, if the outlook for inflation, currently worryingly low, deteriorates further.

"At face value the disappointing data for some countries raises the likelihood that the ECB will feel further action is required to boost the region's recovery and help ensure inflation does not fall further," said Chris Williamson at Markit.

"However, these GDP data are backward-looking numbers and policymakers have made it clear that any decision to cut interest rates or take less conventional action to stimulate growth will rest on the new medium-term staff projections for inflation," he said.

The ECB is scheduled to release its updated inflation forecasts in June.

Jennifer McKeown at Capital Economics also felt the growth data "should encourage the ECB to cut interest rates next month and perhaps announce measures to boost lending in the weaker economies."

Williamson at Markit said the divergent trends among the different member states highlighted the challenge for the ECB in formulating a monetary policy stance appropriate for the entire region.

In Germany, the recovery is being driven by booming domestic demand, with increased consumer and government spending and a sharp increase in investment.

Imports, too, were up sharply, while exports contracted.

"From a fundamental perspective, the German economy remains in excellent shape. We stick to our aggressive growth forecast of plus 2.5 percent for 2014 as a whole," said UniCredit economist Andreas Rees.

Commerzbank economist Joerg Kraemer agreed that the German economy "will continue to expand at a solid rate for a long while yet."

And ING DiBa economist Carsten Brzeski said that "all in all, Germany has again cemented its role as the eurozone's economic powerhouse."

By contrast, France's performance was dogged by ongoing weakness of consumer spending and business investment, its national data showed.

"Today's figures ... suggest that the French 'recovery' remains very fragile," said Natixis economist Jean-Christophe Caffet.

"We therefore maintain our view of a very progressive recovery ... with France underperforming the euro area in the two coming years."

The data underlined the need for further reforms, analysts said.

Tom Rogers at EY Eurozone Forecast also believed that "today's GDP numbers should act as a wake-up call for any eurozone policy makers tempted towards complacency about the road to recovery."

Stagnating output in Italy and France, two of the four largest economies, "is in large part a result of deteriorating cost-competitiveness, while Germany and Spain continue to reap rewards from reform implemented either well before the crisis, or more recently," Rogers said.

© AFP 2024

Eurozone growth disappointed in the first quarter, despite a strong showing by economic powerhouse Germany, data showed on Thursday, turning up the heat for another cut in European interest rates.
eurozone, Germany, France, economy
Thursday, 15 May 2014 11:12 AM
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