Germany, France propel euro zone; growth gulf widens

By @ibtimes on

Powerful performances by the German and French economies propelled growth in the euro zone well above forecasts in the first quarter while also highlighting the yawning gap between the bloc's strong and weak.

The 17-nation currency area expanded by 0.8 percent in the first three months of the year, data showed on Friday, fueled by startling 1.5 percent GDP growth in Germany, while the French economy grew 1.0 percent, driven in part by consumer demand.

Economists had forecast euro zone growth of 0.6 percent. Analysts said the better than expected data -- despite Portugal returning to recession and Greece still buried under a debt mountain -- strengthened the case for a European Central Bank rate rise by July, which would be the second this year.

Germany and France account for nearly half the region's gross domestic product. 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 numbers and jumped further to touch $1.4330 briefly on the release of the euro zone number.

This is almost certainly as good as it gets for the euro zone and growth seems likely to moderate over the coming months, said Howard Archer, economist at IHS Global Insight.

The European Commission forecast quarter-on-quarter growth in the euro zone would slow to 0.3 percent in the second quarter and then stabilize at 0.4 percent for the next two quarters.

Nevertheless, there now looks a very decent chance that euro zone GDP growth will reach 2.0 percent in 2011 for the first time since 2007, Archer said.

The European Commission was less optimistic, sticking to its February projection of 1.6 percent growth this year with inflation well above the ECB's two percent target. In 2012, it expects euro zone growth of 1.8 percent.

By contrast in Germany, a top economic adviser to the government, Wolfgang Franz, told TV channel ARD the country's economy could expand by 3 percent or more this year. The Commission expects German growth of 2.6 percent this year.

Analysts were a little more downbeat about France, saying this was probably its high water mark.

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, said Joost Beaumont, an economist at ABN-AMRO.

Italy bucked the trend, growing by just 0.1 percent in the first quarter, posting the same weak rate as the last three months of 2010. The government predicts growth of 1.1 percent this year and the Commission only 1.0 percent.

For the euro zone's most debt-ridden economies, solid growth is a distant dream.

Portugal's economy shrank 0.7 percent in the first quarter, sending the economy back into recession. Its government has admitted that, having sought a bailout, its economy will shrink both this year and next. The Commission expects 2.2 percent contraction in 2011 and 1.8 percent in 2012.

Greece actually achieved quarterly growth -- of 0.8 percent -- for the first time since late 2009 but that followed a vicious 2.8 percent contraction in the last quarter of 2010.

The Commission expects Athens to announce new austerity measures this year to meet its bailout targets. It forecast the economy would shrink 3.5 percent this year if policies are unchanged, but expects 1.1 percent growth in 2012.

Spain gained some support for its efforts to persuade markets it can avoid being sucked into the debt crisis -- its economy expanded 0.8 percent on an annualized basis, its strongest rate since the second quarter of 2008. On the quarter, growth was 0.3 percent.

ECB SET FOR SUMMER HIKE?

Analysts said the ECB looked poised to raise interest rates again in July, having hiked for the first time in two years last month, despite the chasm between Europe's haves and have-nots.

The euro zone is going to have a decent first half of the year ... and I'm sure when we get to the June meeting assuming no financial sector crisis between now and then, the ECB will prepare the ground for a rate rise in July, said Ken Wattret, economist at BNP Paribas in London.

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

In 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 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 its highest since the financial crisis hammered the economy in late 2008, markets expect the bank to look past the debt crisis and raise rates to 1.5 percent in July and again before the end of the year.

(Writing by Mike Peacock and Jan Strupczewski; Editing by Catherine Evans/Ruth Pitchford)

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