June 8, 2011 / 11:00 AM / 8 years ago

UPDATE 1-Investment drives euro zone Q1 GDP growth

* Q1 GDP breakdown indicates recovery is self-sustainable

* Growth to moderate in coming quarters

* ECB still seen raising interest rates in July

(Recasts with economists’ comments)

By Jan Strupczewski

BRUSSELS, June 8 (Reuters) - Investment drove first quarter euro zone economic growth and household and government consumption also made significant contributions, data showed on Wednesday, indicating the recovery has become self-sustaining.

The European Union’s statistics office confirmed its earlier estimate that gross domestic product in the 17 countries using the euro rose 0.8 percent quarter-on-quarter in January-March, up from 0.3 percent in the previous three months.

In year-on-year terms, GDP growth was 2.5 percent, up from 1.9 percent in the last three months of 2010.

“The fact that domestic demand (investment in particular) was the main growth driver in Q1 underpins our view that the recovery has reached full sustainability,” said Chiara Corsa, economist at UniCredit.

Eurostat said that after two quarters of no contributions from investment, gross fixed capital formation was responsible for half of the quarter-on-quarter growth.

Government and household spending added 0.2 percentage point each. There was no contribution from inventories while net trade added 0.1 percentage point.

But after the first quarter surge, growth is likely to moderate in the coming quarters, economists said. Separate trade and output figures from Germany on Thursday added to signs that its hitherto robust recovery was easing somewhat. [ID:nLDE75706Q] [ID:nB4E7GN03F]

“We see euro zone growth falling back to around 0.4 percent quarter-on-quarter for an extended period,” said Howard Archer, economist at IHS Global Insight. “Fiscal tightening increasingly kicking in, slowly rising interest rates and recurrent sovereign debt tensions are all expected to take a toll on growth.”

“In addition, inventory developments are likely to become less favourable while still high oil, food and commodity prices will also weigh down on economic activity through squeezing consumers’ purchasing power and through pushing up companies costs and squeezing their margins,” Archer said.

RATE RISE UNHINDERED

Despite expectations of slightly slower quarterly growth ahead, the European Central Bank was still likely to raise interest rates in July, analysts said.

“This (slower growth) should not be seen as the beginning of a new downturn but rather as a phase of consolidation of the recovery,” UniCredit’s Corsa said.

“We think that the ECB is well aware of that and we expect (ECB President Jean-Claude) Trichet to switch to (strong) vigilance at tomorrow’s meeting, confirming that the next rate hike will be most likely delivered in July,” she added.

Germany and France led euro zone growth with a 1.5 and 1.0 percent quarterly expansion respectively.

In the absence of data for Ireland, Portugal was the only euro zone country in recession, as growth in Greece rebounded strongly to a 0.8 percent expansion from a 2.8 percent contraction in the previous three months.

The euro zone’s first quarter growth was stronger than in the United States, where the economy gained 0.5 percent. Japan was in recession with a 0.9 percent economic contraction after shrinking 0.8 percent in the last three months of 2010.

Reporting by Jan Strupczewski, editing by Rex Merrifield and Patrick Graham

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