German, French growth soars, points to stronger euro GDP

By @ibtimes on

Storming performances by the German and French economies in the first quarter highlight the yawning gap between the euro zone's strong and weak and suggest the forecast for growth in the bloc is well under par.

Germany, Europe's largest economy, grew by a startling 1.5 percent in the first three months of the year, data showed on Friday, with France only paling a little in comparison, growing by 1.0 percent.

Growth of 0.9 and 0.6 percent had been forecast respectively, leaving the 0.6 percent penciled in for the 17-nation currency bloc as a whole liable to be overshot.

Germany and France account for nearly half the region's GDP. Both nations bounced back from a modest showing in the last quarter of 2010 when bad weather hit output.

The euro got a lift from the German GDP numbers, jumping to a session high of $1.4299 in response.

Figures for the euro zone will be released at 0900 GMT (4:00 a.m. EST) with the European Commission's Spring economic forecasts following soon after.

Those are fantastic figures yet again, Christian Schulz at Berenberg Bank said of Germany's numbers. Investments look to have given a boost to the economy. Consumption will however become more and more the engine of growth in the future, since unemployment is dropping (markedly).

Analysts were a little more downbeat about France, saying this was probably its high water mark, with government cuts about to bite.

This is likely as good as it gets, said Joost Beaumont, economist at ABN-AMRO. The recent surge in oil prices is likely to erode household purchasing power, while also eating into company profits, leaving its mark on consumption and investment. Furthermore, we expect fiscal retrenchment to increasingly come to the fore.

Italy bucked the trend, growing by just 0.1 percent in the first quarter, below expectations and posting the same weak growth rate as the last three months of 2010. The government predicts growth of just 1.1 percent this year.

Germany looks set to continue riding high, however.

A top economic advisor to the government, Wolfgang Franz, told German TV channel ARD the country's economy could expand by 3 percent or more this year.

For the debt-ridden members of the bloc, strong growth is a distant dream.

Greek GDP data, due at 0900, are forecast to show the economy remains deep in recession while the Portuguese government has admitted that, having sought a bailout, its economy will shrink both this year and next.

Portugal's data are due at the same time.

But Spain, seeking to persuade markets its prospects are rosier than other parts of the euro zone periphery, saw its economy expand by 0.8 percent on an annual basis, its strongest growth since the second quarter of 2008. On the quarter, growth was 0.3 percent.

IMF WARNING

Austria also put in a strong performance; its growth accelerated to 1.0 percent in the first quarter from an upwardly revised 0.9 percent in the fourth quarter thanks to booming exports, economic research institute WIFO said.

The split nature of Europe's economies demonstrates the difficulties facing the European Central Bank, which raised interest rates for the first time in two years last month, and is expected to repeat the policy dose soon.

The International Monetary Fund said on Thursday that the debt crisis could yet spread to core nations in the single currency bloc.

Its latest report on Europe, the Fund said it was ready to give Greece more aid if the country needed it and urged the ECB to take a cautious approach to interest rate increases, adding the tactic of providing limit-free liquidity to euro zone banks might need to be prolonged.

But with euro zone inflation at the highest since the financial crisis sent the economy into a tailspin in late 2008, financial markets expect the bank to look past the debt crisis and raise interest rates again to 1.5 percent in July and a third time before the end of the year.

(Writing by Mike Peacock; Editing by Catherine Evans)

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