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Eurozone Q1 Growth Modest

Eurozone Q1 Growth Modest
Eurozone Q1 Growth Modest

The eurozone economy has finally recouped all the ground lost in the recessions of the past eight years after official figures Friday showed that the 19-country single currency bloc expanded by a quarterly rate of 0.6% in the first three months of the year.

The scale of the increase reported by Eurostat in a preliminary estimate was unexpected—the consensus in the markets was for a more modest rise to 0.4% from the previous quarter's 0.3%, news outlets reported.

That modest growth brought the eurozone’s gross domestic product for the period—the total value of goods and services produced—to €2.48 trillion ($2.81 trillion).

That was slightly above the previous peak of €2.47 trillion reached in the early months of 2008, before the crisis emerged and Europe’s core economy descended into a pair of crippling recessions.

Eurostat said the increase means that the eurozone economy is now 0.4% bigger than it was in the first quarter of 2008, before the deep recession stoked by the global financial crisis. Since then, the eurozone has had a torrid time, falling in and out of recession as the global financial crisis morphed into a debt crisis that at various times has threatened the future of the euro currency itself.

The eurozone's recovery of the ground lost over the past few years has lagged other major economies, including the US, by years.

Still, it's a signal that the Eurozone is finally gaining some economic momentum. The first-quarter rise came in spite of concerns stoked by the huge volatility in financial markets in the first couple of months of the year that centered on worries over the Chinese economic outlook and the sharp fall in the price of oil.

Pain of Low Inflation

In a further positive development, Eurostat reported that the unemployment rate across the region fell to 10.2% in March from the previous month's 10.4%, bringing it to its lowest since August 2011.

Though these figures are encouraging, the eurozone remains afflicted by low inflation. Eurostat said in a separate report that consumer prices in the year to April fell by 0.2%. That's down from the previous month's annual rate of zero and below market expectations for a more modest decline to minus 0.1%. The core rate, which strips out the volatile items of food, tobacco and energy, also declined to 0.8% from 1%.

Given that the European Central Bank's primary policy purpose is to keep inflation just below 2%, the market reaction to the raft of economic data was muted. While the growth and unemployment figures may have encouraged traders to think that the ECB to be less likely to enact a further stimulus, the inflation data countered that instinct. The euro was unchanged at $1.14 following the data.

Prices Lower

There was also a pickup in inflation expectations. Households expected prices to rise more rapidly over the coming 12 months than they did in March, and that view was shared by manufacturers and retailers.

One of the ECB's key short-term goals has been to prevent lower energy prices from persuading households and businesses that inflation will remain low over coming years. Policy makers fear that should inflation expectations decline significantly, households and businesses will delay their spending, and become more reluctant to borrow for investment.

But, in a setback for the central bank's drive to boost inflation, figures released Thursday showed consumer prices fell during April in Germany and Spain, while they rose at a slower pace in Belgium. Germany's statistics agency said prices were 0.1% lower than a year earlier, having been 0.1% higher in March. In Spain, prices were down 1.2% on the year, having been 1% lower in March.

With a heated debate raging over the merits of the European Central Bank's stimulus measures, it's been easy to overlook the fact that the eurozone economy has been growing steadily for a couple of years now—and looks poised to keep expanding in 2016.

Financialtribune.com