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Euro-Area Factories Fret About Euro as Economic Growth Cools

Updated on
  • GDP rose 0.4 percent in first quarter, down from 0.7% pace
  • Manufacturers say stronger currency is weighing on demand

Euro-area economic growth slowed in the first quarter, posing a challenge for the European Central Bank as it contemplates paring back monetary stimulus measures.

The 0.4 percent expansion was the weakest in six quarters and followed a reading of 0.7 percent at the end of 2017. While temporary factors such as bad weather played a part, another report showed manufacturing continued to cool this quarter and some firms are concerned about the stronger euro.

Lingering economic weakness could increase caution among policy makers. ECB President Mario Draghi has acknowledged the moderation this year, though hasn’t expressed any deep concerns just yet. The European Commission may take a similar view when it updates its economic forecasts on Thursday. European Union Economic Affairs Commissioner Pierre Moscovici said last week that momentum remains “strong, solid, robust.”

The numbers are “still consistent with quite good economic growth,” said Marco Valli, chief euro-area economist at UniCredit Bank in Milan. “The downward adjustment suggests a moderation in growth, but not the beginning of a downturn.”

What Our Economists Say

“More than anything else it’s strong growth that has emboldened the European Central Bank to taper asset purchases. The data should lead policymakers to tread carefully.”

--Jamie Murray and David Powell, Bloomberg Economics

For more, read our Euro-Area React

One concern is the risk of a major trade war, with the International Monetary Fund warning it could undermine global growth. EU finance chiefs sounded the alarm on Saturday after the U.S. signaled it will reject the bloc’s demand for an unconditional waiver from metals-import tariffs.

The factory report from IHS Markit showed that export growth softened in April. Some companies blamed the single currency, up 10 percent against the dollar in the past year.

German manufacturer Osram AG issued a profit warning late last month, citing difficult market conditions and foreign-exchange headwinds. L’Oreal SA also noted unfavorable exchange rates after a drop in reported revenue for the first quarter.

The euro area’s year-on-year pace of GDP growth was 2.5 percent in the first quarter, marking the first slowdown in eight quarters. Still, the 2.8 percent level reached at the end of 2017 was the strongest in years.

In its report, Markit noted that the factory index was at its highest in more than 20 years at the end of 2017, a level that wasn’t sustainable in the long term.

“Let’s not lose sight of the fact that the overall pace of expansion remains encouragingly solid,” said Chris Williamson, chief business economist at Markit. “The trend in the surveys in coming months will provide important clues as to the degree to which underlying demand may be waning and the extent to which policymakers should be concerned.”

— With assistance by Andre Tartar, Kristian Siedenburg, and Carolynn Look

(Updates with economist comment in fourth paragraph.)
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