What Slump? How Eurozone Growth is Bucking the Global Trend

Unusually, the eurozone is leading the way, strong first-quarter growth bodes well for the year

By Richard Barley

Economic growth in the eurozone in the first quarter compared with the fourth quarter was 0.6%, or 2.2% annualized, exceeding estimates by analysts. The Champs Élysée and the Arc de Triomphe in Paris are pictured on Nov. 22. 2012. Photo: European Pressphoto Agency

The eurozone has provided investors with plenty of surprises in the past few years, most of them unpleasant. The economic data released Friday make for a refreshing change.

Eurozone growth in the first quarter versus the fourth came in at 0.6%, or 2.2% annualized. That was better than economists expected. It was also better than first-quarter growth in the U.S. and U.K., although the eurozone remains a laggard overall, with real gross domestic product only just above its precrisis peak. Meanwhile, unemployment continued to fall, reaching 10.2% in March, down 1 percentage point from a year ago. The only fly in the ointment was inflation, which dipped back into negative territory at an estimated minus 0.2% in April.

There is a caveat on growth: this is the first time Eurostat has released such an early estimate of first-quarter GDP, and as such it may be revised. Details are still missing, with no growth estimates publicly available for Germany and Italy in particular, which together account for 45% of the eurozone economy. However, the headline number does suggest decent performance. France and Spain posted strong numbers, with the former recording the biggest jump in household spending since the end of 2004. Domestic demand looks to be driving the recovery.

The performance of the economy is in contrast to the nerves that infected European markets in the first quarter. The end of March saw the Stoxx Europe 600 down some 7.7% for the year, and 10-year German yields nearly half a percentage point lower than at the end of 2015. There was even a panic about eurozone banks, with violent swings in prices for subordinated bonds that count toward capital—although this was a crisis more about investors’ assumptions than the banks themselves.

True, growth may not be sustainable at the first quarter’s pace, as it appears to be well above trend.

The European Commission, for instance, thinks potential annual growth is just 1% in 2016-2017.

Even so, there could be upgrades of the eurozone’s prospects rather than downgrades: BNP Paribas, BNPQY -2.64 % for instance, notes there are “upside risks” to its 1.3% full-year forecast.
The upshot should be a period of calm in monetary policy, too. The European Central Bank unveiled new measures in March and accompanied them with a plea to allow time for them to take effect. Friday’s data suggest that is the right approach to take. The eurozone, for now at least, is bucking the global gloom on growth. 

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