Eurozone Economic Growth Gains Traction In Q1

14:59 GMT

May 2008

(RTTNews) - The Eurozone economy grew more than expected in the first quarter of 2008, boosted by robust expansion in Germany. Additionally a separate report showed that inflationary pressures eased in April. These data raise the likelihood of Eurozone interest rates remaining on hold for sometime.

Thursday, a flash estimate from the statistical agency Eurostat pegged Eurozone first quarter GDP growth at a sequential rate of 0.7%, faster than 0.4% recorded in the final quarter of 2007. Economists were looking for a growth rate of just 0.5%.

Year-on-year, the growth was 2.2% in the first three months of the year, same as in the fourth quarter. This was in contrast to economists’ expectations of growth slowing to 1.9% in the first quarter.

Earlier in the day, data from Germany’s statistical office Destatis showed that German economic growth accelerated to a 12-year high in the first quarter of 2008, led by increased investment and a pick up in consumer spending. Gross domestic product in the largest Eurozone economy grew 1.5% quarter-on-quarter on a price, seasonal and calendar adjusted basis in the first three months of the year. This was a significant improvement over the 0.3% expansion witnessed in the final quarter of last year. Economists had expected only 0.7% growth for the first quarter.

Elsewhere, preliminary data released by the French statistical office INSEE showed that gross domestic product in the second largest economy in the region grew a seasonally and trading-day adjusted 0.6% quarter-on-quarter in the first three months of 2008. The growth rate doubled from 0.3% in the final quarter of 2007. Economists were looking for a growth rate of 0.5% for the first quarter.

Meanwhile, growth slowed in the Dutch economy. The Central Bureau of Statistics said the economy grew at an annual rate of 3.1% in the first quarter, much slower than 4.5% in the previous quarter. Quarter-on-quarter, GDP rose 0.2% compared to previous quarter’s 1.1% growth

The Portuguese economy shrunk on a quarterly basis. The Statistics Portugal said GDP fell 0.2% in the first quarter on a sequential basis, reversing 0.7% growth in the final quarter of 200. The economy grew at a slower pace of 0.9% year-on-year in the first quarter, half the pace of 1.8% in the fourth quarter of 2007.

Growth eased sharply in the Spanish economy. On Wednesday, the National Institute of Statistics announced that the country’s economy expanded 2.7% year-on-year in the first quarter, much slower than 3.5% in the fourth quarter of 2007. Quarter-on-quarter, growth tumbled to 0.3% from 0.8%.

Separately, the latest Survey of Professional Forecasters of the ECB showed that experts revised down their forecast for 2008 Euro zone growth to 1.6% from 1.8%. The real GDP growth is seen at 1.6% in 2009, representing a 0.4 percentage point downward revision.

The experts hiked average inflation forecast for 2008 to 3% from 2.5%. The survey participants also raised 2009 inflation expectations to 2.2% from 2%.

Though the recent data is likely to keep Eurozone rates on hold in the near term, the European Central Bank may come in for sharp criticism given the disparity in the performance of different Eurozone economies. Last week, the central bank kept it’s key interest rate on hold at a six-year high of 4% as policymakers maintained their inflation fighting stance, refusing to be drawn by a slowing economy.

An above-target inflation rate is preventing the ECB from lowering borrowing costs in the Eurozone, after the U. S. and the UK cut their interest rates. The central bank has maintained interest rates since June last year. Many analysts expect the ECB to lower interest rates after September.

A final report from the Eurostat showed Thursday that Eurozone annual inflation fell to 3.3% in April from 3.6% in March. The core annual inflation, which excludes energy, food, alcohol and tobacco stood at 1.6%, down from 2% in the previous month. Month-on-month, the consumer price index, or CPI rose 0.3% in April.

CPI annual inflation continues to stay well above the central bank target, which is to keep the inflation rate “below, but close to, 2% over the medium term”. Policymakers are concerned that surging oil and food prices may prompt unions to seek bigger pay hikes, adding further to inflationary pressures in what are called second round effects.

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