World Economy

Germany Pushes Ahead as Italy Debt Pile Grows

Germany Pushes Ahead  as Italy Debt Pile GrowsGermany Pushes Ahead  as Italy Debt Pile Grows

Germany’s economy more than doubled its expansion rate in the first quarter as spending picked up, cementing its role as the growth engine for the region, while Italy’s economy expanded in the first quarter but still posted a record high government debt.

Showing the effects of high-powered monetary stimulus appears to be gaining traction, the eurozone’s dominant economy grew 0.7%, its strongest quarterly rate since an identical reading in the first quarter of 2014 as higher state and household expenditure more than offset a dip in foreign trade, the Federal Statistics Office said, Bloomberg reported.

Separate national GDP data published Friday showed that quarterly growth accelerated to 0.3% in Italy and to 0.5% in the Netherlands.

In Italy, government debt hit a record-high €2.23 trillion in March. Its debt-to-GDP ratio is the second-highest in the eurozone after Greece.

 “We need to stress that Italy is lagging behind other eurozone economies, in particular France and Germany which beat estimates, and Spain which confirmed strong growth despite the political uncertainty,” said Mirco Bulega, economist at Edmond de Rothschild.

For the German economy, consumption has overtaken trade as the key growth driver, with record-low unemployment, low interest rates and higher wages pushing households to spend more.

A two-stage wage increase of 4.8% over 21 months agreed by trade unions, should further boost consumption.

“It is likely that higher public expenditure contributed to growth in a number of countries, in some cases lifted by spending to deal with the influx of refugees, which was true of Germany,” Howard Archer, chief European economist at IHS, said of Eurostat data.

Italian GDP expanded 1% from the same quarter of 2015, Istat said. The statistics agency revised fourth-quarter GDP growth upward to 0.2% from the 0.1% previously reported.

  Consumer Demand

Improvements in employment and consumer demand supported Italy’s return to growth in 2015, though the economic expansion progressively slowed during the year. In April, Istat said that the recovery may cool this quarter amid weak price dynamic and industrial output.

Production was unchanged in March with all industries except energy and machinery declining in the period.

Still, Loredana Federico, lead Italy economist at UniCredit Bank in Milan, stressed in a note that the first quarter had “one of the fastest paces of expansion for Italy over the last five years” for the nation’s GDP. “Under the conservative assumption of flat growth over the remaining three quarters of the year, Italy should be able to grow at the same pace in 2016 as it did in 2015,” she wrote.

  Banking Woes

Italian banks have about €360 billion ($407 billion) gross amount of non-performing loans. Bank of Italy Governor Ignazio Visco said last week that while some of the country’s bankers made mistakes or even committed crimes, the bad-loan problem is mainly due to a 25% plunge in industrial output in the six years through 2014.

Italy’s GDP remains about 8% below its pre-crisis peak reached in 2007. The 19-nation eurozone has regained that level with its main economies, France and Germany that have long surpassed it.

Earlier in May, the European Commission cut Italy’s growth projection for 2016 to 1.1% from 1.4%. The EU executive arm also said that, following the revision and the weak prospect for inflation, Italy will fail to reduce this year its debt ratio of GDP, the eurozone’s second-biggest after Greece.