European Exports, Government Spending Led Expansion

Exports and government spending helped Europe’s economy sustain a recovery in the first quarter, countering a continued slump in company investment.

Exports in the 16 euro nations rose 2.5 percent from the fourth quarter, when they increased 1.7 percent, while state spending climbed 0.6 percent, the European Union’s statistics office in Luxembourg said today. Business investment fell for an eighth quarter, dropping 1.1 percent. Gross domestic product rose 0.2 percent, matching a May 12 estimate.

Europe’s economy probably gathered strength in the current quarter, aided by an Asian-led global recovery. Bayerische Motoren Werke AG, the world’s largest luxury carmaker, said May 18 it expects “significantly” higher earnings this year. The pace of growth may be shackled by the impact on domestic demand from unemployment at a 12-year high and austerity measures by governments in the wake of the region’s debt crisis.

“The fate of the euro zone’s lopsided recovery will continue to depend upon the strength of external demand,” said Martin van Vliet, an economist at ING Group in Amsterdam. Domestic demand is likely to be “hit by the impact of the draconian austerity measures in the periphery, and the broader confidence fallout from the sovereign-debt turmoil.”

Inventories

Consumer spending slipped 0.1 percent in the first quarter, the statistics office said, while imports jumped 4 percent. Construction plunged 2.7 percent in the quarter. Stockpiling helped the economy, with changes in inventories adding 0.8 percentage points to growth.

The euro remained higher against the dollar after the report and was up 0.3 percent to $1.2198 as of 10:35 a.m. in London. German government bonds remained little changed, with the yield on the 10-year bund at 2.67 percent.

From a year earlier, GDP rose 0.6 percent in the first quarter, the first annual gain since the third quarter of 2008. Exports jumped 6 percent in the year and government spending increased 2 percent. Company investment fell 5 percent.

In the fourth quarter, the GDP rose 0.1 percent, according to the statistics office, which initially reported that the economy stagnated.

Export Hopes

While the debt crisis has undermined investor confidence in the euro area, it has benefited for exporters. The euro has dropped 15 percent against the dollar this year, making exports more competitive just as the global economy gathers strength. The Organization for Economic Cooperation and Development on May 26 raised its 2010 global growth forecast to 2.7 percent, citing expansion in economies including China.

Munich-based BMW said last month that orders for its revamped 5-series have “considerably” exceeded targets, though there are still “numerous risks that might prolong a complete recovery.” Prada SpA, owner of the eponymous Italian fashion label, said on May 24 that first-quarter revenue rose 26 percent, driven by increased demand in emerging markets.

The recovery is showing some signs of losing momentum. European manufacturing expanded at a weaker pace in May and unemployment increased to 10.1 percent in April, the most since 1998. Economic sentiment unexpectedly worsened last month.

To contain the debt crisis, European policy makers last month unveiled a 750 billion-euro ($915 billion) rescue package. Governments in Spain, Greece and Italy agreed to intensify budget cuts as part of efforts to restore confidence in the euro, a move that could stifle consumer demand.

The European Central Bank also stepped up measures and began purchasing government and private bonds. The Frankfurt- based central bank, which forecast 2010 growth of 0.8 percent in March, will release new economic staff forecasts on June 10.

While export growth in the first quarter was “encouraging,” there is “still no sign that the external upturn is feeding through to stronger domestic demand,” said Ben May, an economist at Capital Economics Ltd. in London. “With fiscal tightening set to intensify, there is little prospect of an improvement any time soon.”

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

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