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German Economy Stumbles as Europe Suffers Setback in Growth

Bloomberg logoBloomberg 15/05/2018 Piotr Skolimowski

Economic growth slowed across Europe at the start of the year, with Germany seeing its pace of expansion cut in half amid weaker trade.

The 0.3 percent increase in Europe’s largest economy was softer than forecast and the weakest in more than a year. Dutch and Portuguese growth also cooled more than expected in the first quarter, while a similar trend was seen across central and eastern Europe.

A deceleration in euro-area momentum to 0.4 percent was confirmed, while investors’ expectations for the outlook remained close to the lowest since 2016. That raises the question for the European Central Bank whether this is merely a soft patch or indicative of something more alarming.

a screenshot of a cell phone: Tepid Start © Bloomberg Tepid Start

So far, officials have largely dismissed the sluggish start to the year -- blaming factors such as colder weather -- and expressed confidence that weakness will dissipate. Speaking on Monday, ECB Governing Council member Francois Villeroy de Galhau argued that euro-area growth remains solid and broad-based and that policy makers were still likely to halt asset purchases this year.

What Our Economists Say About Germany

“Whether this marks the end of a robust expansion or is just a bump in the road is crucial to understand as the ECB mulls the end of asset purchases. We think a modest amount of momentum has been lost, but that 2Q will see a rebound.”

-- Jamie Murray and David Powell, Bloomberg Economics. 

The European Commission has also downplayed concerns and this month maintained its forecast that full-year growth will almost match the decade-high pace hit in 2017. Still, there are threats, including rising trade protectionism and a stronger euro that could act as dampers on the expansion in Germany and the euro zone.

Some of those issues were highlighted by the International Monetary Fund in a report published Tuesday. While it sees “strong growth” for now, the “favorable outlook is subject to several risks that are mainly to the downside over the medium term.”

Germany’s statistics office said first-quarter growth was bolstered by a pickup in equipment investment and construction and a slight increase in private consumption. Government spending declined for the first time in almost five years, with exports and imports also down.

The Economy Ministry said on Tuesday that the upturn “remains intact.” Just last week, Siemens AG raised its outlook for full-year earnings, and HeidelbergCement AG said the economic upswing will boost construction activity in its major markets after a long winter held back first-quarter results.

While shrugging off the recent weakness, the ECB said last month that global risks have become “more prominent.” The ZEW institute said Tuesday that trade concerns, the U.S. withdrawal from the Iran nuclear deal and higher oil prices are having a “negative impact” on the outlook.

Confidence Shaken © Bloomberg Confidence Shaken

“The international environment remains fairly good unless Trump totally spoils it, the domestic environment is very good,” said Holger Schmieding at Berenberg Bank in London. “The German economic outlook looks good despite a dent now.”

In news that might please European central bankers in their long battle to revive inflation, French wage growth accelerated in the first quarter to 0.7 percent. While the quarter is often stronger than the rest of the year, that’s still the biggest increase since 2013.

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