Euro zone first-quarter growth disappoints, puts pressure on ECB to act

BRUSSELS/BERLIN Thu May 15, 2014 11:31am EDT

A worker controls the cast at a blast furnace of German steel manufacturer Salzgitter AG in Salzgitter March 24, 2010. REUTERS/Christian Charisius

A worker controls the cast at a blast furnace of German steel manufacturer Salzgitter AG in Salzgitter March 24, 2010.

Credit: Reuters/Christian Charisius

BRUSSELS/BERLIN (Reuters) - The euro zone economy grew much less than expected at the start of the year and inflation remained locked in the 'danger zone' below 1 percent, increasing pressure on the European Central Bank to ease monetary policy at its next meeting in June.

The 9.5 trillion euro economy expanded only 0.2 percent quarter-on-quarter in the first three months of 2014, the same as the downwardly revised rate in the last quarter of 2013, while economists had expected 0.4 percent growth.

The first quarter figure stayed positive mainly thanks to strong growth in the biggest economy Germany, which compensated for stagnation in France and shrinking output in Italy, the Netherlands, Portugal and Finland.

"Today's figure is a major disappointment, as it suggests that the euro zone is still far away from reaching the escape velocity required for a sustainable recovery," said Peter Vanden Houte, chief euro zone economist with ING.

With growth so weak and consumer price growth well below the ECB target, the bank is preparing a package of measures for its June meeting, including cuts in all its interest rates and steps to fight the risks of deflation.

"The package...the ECB appears to be preparing is welcome... but the overall steps are likely to be too small to make a real difference," said Nick Kounis, economist at ABN AMRO.

"More aggressive easing than the ECB currently seems to be considering would help from that perspective," he added.

German quarterly growth of 0.8 percent marginally exceeded forecasts and was double the pace at the end of 2013. The zero growth in France was a disappointment compared with expectations of 0.2 percent growth.

Inventory changes and public spending were the only factors which kept the French economy from contracting while Germany's performance was driven largely by domestic demand, French and German statistics office data showed.

France will now need 0.5 percent growth each quarter to meet a government forecast for 1 percent growth in 2014, Natixis Asset Management chief economist Philippe Waechter said.

"France's public finance plan has been built on the 1 percent growth forecast. If we don't achieve it, France will not meet its (debt and deficit) targets for 2014 and 2015," Waechter said. Missing the deficit targets again is likely to put Paris on a collision course with European Union rules under which it has to cut its deficit below 3 percent of GDP by 2015.

France is not the only euro zone member in the doldrums.

Italy defied growth expectations and contracted 0.1 percent, denting a fragile recovery begun at the end of last year when the country finally put an end to its longest recession since World War Two.

The euro zone growth outlook for the second quarter was poor too, which will not help reduce the risks of deflation.

"We believe GDP growth is unlikely to be stronger in Q2 than in Q1. This 'recovery' remains far too weak to halt deflationary pressures," said ING's Vanden Houte.

Germany expects domestic demand to drive growth of 1.8 percent this year and Finance Minister Wolfgang Schaeuble said that everything pointed to a broad economic pick-up.

Meanwhile France is facing a public sector strike by the hardline FO labor union over civil service pay freezes - a reminder of the difficulties of enacting reform and making the French economy more competitive.

Greece, after four years of tough reforms introduced in exchange for a 240 billion euro bailout, continued to shrink year-on-year in the first quarter, but at the slowest pace since early 2010, adding credibility to expectations that Athens will limp out of a six-year recession this year.

The silver lining is the absence of pressure from the markets, with borrowing costs for many euro zone countries at record lows.


The ECB has said a strong euro is one of its concerns, given the downward pressure it puts on import prices and exports.

France wants euro zone governments to take action on the currency and has called for negotiations to weaken it after EU parliament elections next week.

But the head of France's Medef national employers association said on Tuesday that Paris should not use its call for a weaker euro as a substitute for much-needed reforms.

Other euro zone countries which have taken strong medicine to improve competitiveness are starting to see the benefits.

Spain reported first quarter GDP growth of 0.4 percent two weeks ago, giving a year-on-year expansion of 0.6 percent, the strongest in three years. The Spanish government upped its 2014 growth forecast to 1.2 percent from a previous 0.7 percent.

In global terms, much depends on demand for European goods from China, but there are positive signs elsewhere.

Japan clocked its fastest pace of growth in more than two years in the first quarter, raising hopes the economy will have enough momentum to tide over an expected slump following an April 1 sales tax hike.

And the United States is expected to bounce back from a weather-ravaged start to the year.

(Additional reporting by James Mackenzie in Rome, Madeline Chambers in Berlin, Jussi Rosendahl in Helsinki and Anthony Deutsch in Amsterdam. Writing by Mike Peacock, Martin Santa and Jan Strupczewski; Editing by Toby Chopra)

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Comments (6)
ExDemocrat wrote:
France’s excessive government involvement in economic matters has led to its poor results. Comparatively high taxes and too much government meddling in business leads to the same phenomena in France as is being seen in places like Democrat-led Illinois, Rhode Island, New York and California, i.e., people voting with their feet going to where it is more legal to be successful, and where they are allowed to keep more of what they earn through their enterprise.

May 15, 2014 5:23am EDT  --  Report as abuse
The “Dont blame the Euro” is totally unanaceptable from Economics perspective!
1. Monetary policy tools cannot be the same in all EU countries since they have different needs and liquidity targets cannot be met, e.g. In Germany they work, but in Greece, Italy, Spain dont!
2. A strong currency kills exports for local producers! That does not apply in Germany where currency is as it should be and she is benefiting from the fixed currency to export in other EU countries!
3. When a country faces “Crisis” like Greece! Public Spending can boost development! “In the Long Run we will all be dead” as Keynes said!
Ask the “lost generations” how they fell about long run equillibrium!

This is unacceptable! And it “smells” more than that since deliberate errors e.g. In Greece with these policies dictate a master plan for EU north to became a high quality “Chinese” workers place! People with PhD s are getting paid 600-800 euros, and we are talking about massive unemployements to boost salaries further! In Greece ALL EU has cared about is cutting salaries! NOTHING ELSE! The SAME CORRUPTION (worse actually according to all official stats) exists and they are talking about “success story”? Where is the success? In giving corrupted people more money to spend?

As it came out also in the FT article, Greek citizens were sacrificed to save the Euro! Of course for some interests shake! Its wrong! Its a mistake for the corrupted politicians to have became KINGS just because they assisted the “Euro” and sold out their own voters!

Euro should be abandonned for Countries like Greece! Not changing “English law” at bonds, making (un)”voluntary” defaults and supporting corrupted policians, while unemployement, poverty and sucides have skyrocketed in the country!

May 15, 2014 6:26am EDT  --  Report as abuse
pbgd wrote:
An average “growth” of only O.2% is just another word for stagnation. Combined with deflation it may produce the dreaded “stagflation” that would become a truly serious problem.

May 15, 2014 9:21am EDT  --  Report as abuse
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