Multispeed Euro-Area Recovery Underpins ECB Call for Caution

  • First-quarter growth in 19-nation bloc confirmed at 0.5%
  • Expansion led by Spain, Germany, with Greece back in recession

The euro area’s economic recovery is on track -- just not for everyone.

Growth of 0.5 percent in the three months through March -- confirmed by the European Union’s statistics office on Tuesday -- masks still-uneven momentum in the region’s 19 nations. While Spain registered an expansion of 0.8 percent and gains in gross domestic product exceeded 1 percent in some of the bloc’s smaller nations, the Greek economy contracted for a second quarter, putting it back into recession.

The figures underpin Peter Praet’s argument that the European Central Bank must be extremely cautious in unwinding stimulus, even though the recovery is increasingly becoming solid and broad. The institution’s chief economist and his colleagues have started to discuss an exit strategy, and investors and economists are debating whether a first signal will already be given after next month’s policy meeting.

Sentiment surveys are painting an optimistic picture. Economic confidence in the euro area is the highest in almost a decade, and a purchasing managers’ survey for April suggested the strongest private-sector activity since 2011. Germany’s ZEW Center for European Economic Research in Mannheim said in a separate report on Tuesday that its gauge for investors’ confidence rose to 20.6 this month from 19.5 in April.

“There is still a little question mark between soft data -- so surveys are very strong -- and hard data which are a little bit inbetween,” Praet said on Monday. “They are not very strong yet, we want to wait a little bit more on the hard data.”

Growth Driver

Germany, Europe’s largest economy, confirmed its role as growth driver in the region with an expansion of 0.6 percent, according to the Eurostat report. First-quarter gross domestic product increased 0.3 percent in France and 0.2 percent in Italy.

“With the exception of Italy, all the big economies are keeping pace,” said Christian Lips, an economist at NordLB in Hanover. While the election of Emmanuel Macron as French president means the likelihood of “greater economic dynamism” is increasing in the region’s second-largest economy, in Italy “we don’t see much room for improvement” in the short term, he said.

Brexit negotiations and the threat of protectionist U.S. trade policies are also still weighing on the outlook. Nevertheless, the European Commission last week raised its 2017 growth forecast to 1.7 percent, arguing that some uncertainties surrounding the outlook have diminished.

“Political risks have retreated somewhat,” Bundesbank President Jens Weidmann said after a meeting of Group of Seven finance chiefs last weekend. But “it would be wrong to be satisfied with the current growth rate.”

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