Germany sprints ahead of flagging eurozone recovery
(FRANKFURT) - The German economy, Europe's biggest, sprinted ahead in the first quarter of 2014, amid a big setback for the eurozone which highlighted the fragility of the recovery, data showed on Thursday.
Germany, the region's economic locomotive, saw growth double to 0.8 percent in the period from January to March, the strongest quarterly growth for three years and ahead of analysts' expectations.
But the French economy, described 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.
And gross domestic product in Italy, with the third-biggest eurozone economy, shrank by 0.1 percent; and in Portugal, about to emerge from a boilout corset, output contracted by 0.7 percent.
Overall the 18 countries that share the euro notched up meagre growth of 0.2 percent in the first three months of this year, far short of analysts' expectations.
In Germany, the statistics office said that the recovery was propelled by booming domestic demand, with increased consumer and government spending and a sharp increse 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."
- Germany still eurozone's powerhouse -
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."
France has complained that the strong euro is impeding the region's recovery. And the falling exports in Germany appear to back that up.
Nevertheless, the GDP data "highlight the need for economic reforms to boost growth in the weakest economies, and in particular France," said Chris Williamson at Markit.
"The weakness of the French economy at the start of the year raises the prospect that the country will miss its modest 1.0-percent growth target for the year, adding to the need to even greater reforms," he predicted.
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.
- Challenge for ECB policy -
Looking at the eurozone as a whole, "very divergent trends across the varying member states in the first quarter highlight the ongoing challenge" faced by the European Central Bank in formulating a monetary policy stance appropriate for the entire region, Williamson said.
The ECB has held its key interest rates at their current all-time lows since November. But the central bank's chief Mario Draghi hinted last week that further easing was on 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 Williamson.
"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 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."