Euro-Area Economy Grows Faster as Consumption Gathers Pace

Southern Europe: A Good Buy?
  • First-quarter GDP increases 0.6% vs. May 13 reading of 0.5%
  • Expansion driven by household consumption, investment

The euro-area economy grew faster than previously estimated at the start of the year, driven by investment and a pickup in consumer spending.

Gross domestic product rose 0.6 percent in the first quarter, the European Union’s statistics office in Luxembourg, said on Tuesday. That’s the rate Eurostat initially reported on April 29 before revising growth down to 0.5 percent on May 13.

After growing at the fastest pace in a year, the European Central Bank predicts the 19-nation economy will slow in the second quarter, with inflation rates likely to remain very low or even negative. Among the downside risks to the outlook President Mario Draghi cited last week when he kept stimulus unchanged were subdued prospects in emerging markets, slow progress in structural reforms, and the U.K.’s June 23 referendum on whether to remain in the European Union.

“The fact that both household consumption and investments are improving is helping a more sustainable recovery in the euro zone,” said Bert Colijn, senior economist at ING Bank NV in Amsterdam. “Without strengthening exports, it seems likely that the pace of growth will decline somewhat this quarter, but a moderate pace should be maintained.”

Diverging Trends

Diverging paths within the bloc constitute an additional challenge for policy makers who have deployed a raft of unconventional measures including negative interest rates and asset purchases to stoke inflation.

Germany has benefited from record-low unemployment, and a drop in crude oil prices has proved a boon to disposable incomes. Business sentiment improved to the strongest level in five months in May, a sign momentum in Europe’s largest economy remains strong. Yet countries such as Italy or Greece have fared less well, bedeviled by high joblessness, bad loans, and bureaucratic red tape

“Southern European companies have gone through a lot of pain, those economies have gone through a double dip recession in the last seven years,” Amber Capital Managing Partner Joseph Oughourlian told Bloomberg’s Francine Lacqua on “The Pulse.” Now, the external macroeconomic environment is “pretty positive” for that region, he said.

In the euro area, spending in the private sector accelerated to 0.6 percent in the three months through March from 0.3 percent in the previous period, according to the report. Growth in government expenditure slowed to 0.4 percent from 0.5 percent, while gross fixed capital formation rose 0.8 percent in the first quarter, down from 1.4 percent. Imports outpaced exports, with net trade subtracting 0.1 percentage point from GDP.

China Slowdown

International trade, particularly demand from China, is weighing on euro-area prospects. Policy makers in the world’s most populous nation are attempting to steer the economy to growth driven by consumers and services, with officials struggling to rein in surplus production in industries from steel to coal without undermining growth and potentially harming other regional economies.

ECB officials took a more optimistic view on 2016 euro-area economic growth last week, revising their forecasts to 1.6 percent from 1.4 percent. They retained their estimate for 2017 at 1.7 percent and cut the forecast for 2018 to 1.7 percent from 1.8 percent.

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