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Germany and France Power Euro-Area Growth

Germany and France powered economic growth in the euro area in the first quarter as booming exports fueled domestic spending in the bloc’s core, offsetting turmoil sparked by sovereign debt woes in Greece, Ireland and Portugal.

German gross domestic product jumped 1.5 percent from the fourth quarter and the French GDP rose 1 percent, exceeding economists’ median forecasts of 0.9 percent and 0.6 percent respectively. Austria’s economy grew 1 percent and Holland’s expanded 0.9 percent. First-quarter GDP figures for the 17- nation euro region are due from the European Union’s statistics office in Luxembourg at 11 a.m.

“Germany and France are the main drivers of growth in the euro zone,” said Chiara Corsa, an economist at UniCredit Global Research in Milan. “We see clear upside risks to our GDP forecast of 0.6 percent growth for the euro area.”

Expansion in the region’s two largest economies is putting pressure on the European Central Bank to keep raising interest rates even as the debt crisis afflicting peripheral countries worsens. With German unemployment at a 19-year low helping to boost consumer spending, the government predicts growth of 2.6 percent this year after last year’s record 3.6 percent.

“The recovery has become more broad-based,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “While the German economy certainly won’t keep this fantastic pace, the outlook is pretty rosy.”

Blue Skies

The euro rose to $1.4303 at 10 a.m. in Frankfurt from $1.4229 before the German data were published. From a year earlier, German GDP surged 5.2 percent, the biggest increase recorded since reunification two decades ago.

“These are fantastic figures,” said Alexander Krueger, head of capital-market analysis at Bankhaus Lampe KG in Dusseldorf. “We expect full-year growth of more than 3 percent. The skies are blue right now for the German economy.”

Company investment, construction and household consumption all contributed to German growth, the statistics office said. With exports and imports both expanding, net trade made a smaller contribution than domestic demand, it said. In France, export growth accelerated to 1.4 percent from 0.3 percent in the previous quarter and household spending gained 0.6 percent, Paris-based Insee said.

Export Boom

German exports surged 7.3 percent in March to the highest monthly value since records began in 1950, and industrial production increased for a third month as construction surged. At 7.1 percent, unemployment is the lowest on record in reunified Germany.

Bayerische Motoren Werke AG (BMW), the world’s largest maker of luxury vehicles, earned more money per car than ever before in its 95-year history, the company said May 4. BASF SE (BAS), the world’s biggest chemical company, last week reported first- quarter profit that beat analysts’ estimates.

“If anything, the risks for German growth are on the upside,” said James Nixon, chief European economist at Societe Generale SA in London. “Germany has done its homework, has put in place some painful reforms and is benefiting now.”

The strength of Germany and France helped boost Spanish exports, offsetting some of the effects of government spending cuts. Spain’s economy expanded 0.3 percent in the first quarter, beating the 0.2 percent predicted by the Bank of Spain last week. Germany and France are Spain’s biggest trading partners.

‘Huge Divergences’

Some countries are still struggling to revive their economies after the region’s debt crisis forced governments to toughen austerity measures. Greece’s credit rating was cut two levels this week to B from BB- by Standard & Poor’s, which said further reductions are possible as the risk of default rises.

“There are still huge divergences within the euro zone and we suspect that growth even in the core will slow during the course of this year as the export boom fades and the fiscal squeeze takes hold,” said Jonathan Loynes, European economist at Capital Economics Ltd in London. “Accordingly, while we now expect euro-zone GDP to grow by 1.5 percent this year -- and 2 percent is quite possible -- we don’t expect that to prevent the fiscal crisis from continuing to deepen.”

To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Jeffrey Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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