Eurozone returns to growth in first quarter

The eurozone economy returned to growth in the first three months of the year as output expanded 0.1 per cent, but it undershot economists’ expectations as stagnation in Germany offset stronger performances elsewhere in the bloc.

The weaker than forecast growth in the first quarter, coupled with data showing inflation remained sticky in several eurozone countries, will complicate the decision for the region’s rate-setters of how much to raise borrowing costs when they meet next week.

The rise in eurozone gross domestic product was an improvement from the stagnation in the final quarter of last year, but it was below the 0.2 per cent forecast by economists in a Reuters poll. 

Compared with the same period a year ago, output in the 20-country currency bloc rose 1.3 per cent.

Investors took the muted eurozone growth figure as a sign the European Central Bank was likely to slow its interest rate rises when it meets on May 4. German two-year bond yields fell 0.16 percentage points to 2.7 per cent, while the euro dropped 0.4 per cent against the dollar to $1.0985.

Economists are divided on whether the ECB will switch from a half percentage point rate rise to a quarter point move next week. Policymakers have said incoming data will be decisive.

While Germany’s failure to grow was an improvement from a 0.5 per cent decline in the fourth quarter, it was weaker than the 0.2 per cent growth forecast by economists in a Reuters poll.

However, the French, Italian and Spanish economies all saw output expand. Italy and Spain both recorded strong growth of 0.5 per cent in the first three months of the year.

Italy’s figure outstripped economists’ expectations for growth of 0.2 per cent and rebounded from a contraction of 0.1 per cent in the previous quarter. Spain’s economy also grew at a faster than expected rate.

French growth accelerated to 0.2 per cent over the first three months of this year, up from 0.1 per cent in the fourth quarter of 2022 and in line with expectations.

However inflation in the eurozone’s second-largest economy increased more than economists had forecast, rising to 6.9 per cent in the year to April from 6.7 per cent in March.

Inflation in Spain also increased to 3.8 per cent in April, up from 3.1 per cent in March. However, core inflation, which strips out energy and unprocessed food prices to give a better indicator of underlying price pressures, dipped to 6.6 per cent in Spain from 7.5 per cent a month earlier.

The IMF has told central bankers in Europe not to pause or relent in their attempts to tame inflation, saying it was better to err on over-tightening policy than to declare victory prematurely over rising prices.

Alfred Kammer, the director of the IMF’s European department, said this week that core inflation will prove “much more persistent” than people expect, and that rate-setters should not relax — even though headline inflation is now far below the peak of 10.6 per cent recorded in October 2022.

The ECB has already raised rates at an unprecedented pace in an attempt to bring eurozone inflation down to its 2 per cent target. It has increased its deposit rate from minus 0.5 per cent last summer to 3 per cent in March. The latest figures for eurozone inflation are due out on Tuesday.

Growth in several economies was boosted by strong export sales, which offset declining or stagnant demand from households.

French exports rose 1.1 per cent in the first quarter, helping to compensate for weak consumer spending following months of industrial action. Imports also fell 0.6 per cent, meaning trade provided a substantial lift to the economy.

Exports jumped 5.8 per cent in Spain from the previous quarter, which partly reflected a rebound in tourism, while domestic demand contracted 0.8 per cent.

Germany’s federal statistical agency said on Friday that strong growth in exports and investment in the eurozone’s largest economy was offset by weaker domestic demand.

French inflation exceeded the 6.6 per cent rate forecast by economists polled by Reuters. However, Spanish inflation was below the predicted 4.4 per cent rate. Spanish output growth outstripped the 0.3 per cent economists had expected and was up 0.2 per cent over the previous three month period.