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EU economy underperforms with weakness from France to Italy

LiveMint logoLiveMint 15-05-2014 Stefan Riecher

Frankfurt: The euro-area recovery failed to gather momentum last quarter, as France unexpectedly stalled and economies from Italy to the Netherlands shrank.

Growth of just 0.2% for the currency bloc, half as much as economists had forecast, adds pressure on the European Central Bank (ECB) to deliver stimulus measures next month in its battle against weak inflation and anemic output. While German expansion doubled to 0.8%, that wasn’t enough to offset renewed weakness across the region, including a 0.7% drop in Portugal.

ECB President Mario Draghi primed investors last week for further stimulus in June, saying the 24-member Governing Council is comfortable with acting next month. With the euro area’s recovery from a record-long recession still fragile, officials are battling to revive price growth, with the inflation rate at less than half the ECB’s target.

First-quarter growth in the euro area was decent, but some leading indicators already suggest that the second quarter might be weaker again, Martin van Vliet, senior economist at ING Groep NV in Amsterdam, said before Thursday’s release. Against this backdrop, the ECB looks set to back up its rhetoric with action at next month’s policy meeting.

Germany, the euro area’s largest economy, led the first quarter expansion, with GDP up 0.8%, beating economists’ forecasts. Yet that was offset by France, which unexpectedly stagnated, and Italy, where GDP declined 0.1%.

‘Solid demand’

Four quarters of growth have spurred some optimism among companies in the currency bloc.

Belgium’s Bekaert NV expects sustained solid demand in Europe, the world’s largest maker of steel cord for tires said on 14 May. The upward trend in demand from automotive markets in Europe as of the second half of 2013, continued at the start of 2014.

ThyssenKrupp AG, Germany’s largest steelmaker, this week raised its full-year earnings forecast and reported the first quarterly profit in almost two years after selling assets and cutting costs.

Yet the euro zone continues to struggle with the legacy of the debt crisis. The unemployment rate was 11.8% for a fourth month in March, near the all-time high of 12% last year. The annual inflation rate was 0.7% in April, Eurostat said on Thursday in a separate report.

The economy will probably expand 0.3% in the second quarter, according to the median of 28 economists’ forecasts in a separate Bloomberg survey.

Investor expectations

Even in the euro-zone powerhouse, Germany, there are signs of a potential slowdown in the second quarter. The ZEW Center for European Economic Research in Mannheim, which aims to predict economic developments six months in advance, said this week its index of investor expectations slid for a fifth month in May to the lowest since January 2013.

The Bundesbank has warned that while the economy shows an upward trend, growth will slow noticeably in the three months through June.

The euro-area recovery is proceeding at a slow pace and it still remains fairly modest, Draghi said last week in Brussels after the ECB left its benchmark rate at 0.25% and its deposit rate at zero. There is consensus about being dissatisfied with the projected path of inflation.

While officials have stressed that no decision on policy action in June has been made, economists from BNP Paribas SA to Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc predict the ECB will cut interest rates.

‘Row of possibilities’

Should the ECB decide to act, it might deploy multiple tools rather than just reducing borrowing costs. Options include offering more long-term loans to banks or halting the sterilization of liquidity from crisis-era bond purchases under the Securities Markets Program.

We never precommit unconditionally, but there is a row of possibilities, ECB Executive Board member Yves Mersch said yesterday in Berlin.

Draghi will present revised macroeconomic forecasts when policy makers meet in Frankfurt in June. The ECB predicted in March that GDP will rise 1.2% this year, 1.5% in 2015 and 1.8% in 2016. Inflation is projected at 1% in 2014, accelerating to 1.5% in 2016.

I think it’s pretty much decided that the ECB will cut both the refinancing rate and the deposit rate in June, said Richard Barwell, senior economist at Royal Bank of Scotland Group Plc in London. Yes, economic growth in the euro area is picking up, but I doubt it’s strong enough to stop the ECB from further action. BLOOMBERG

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