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 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.
“The recovery is still more or less in train in most countries, but the headline number is disappointing and the horror show was the Dutch number,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London. “We think the ECB is going to act in June, and we think it will be a package of measures.”
The euro pared losses against the dollar after today’s data were released, trading at $1.3674 at 11:21 a.m. in Brussels, down 0.3% on the day. The Stoxx Europe 600 Index was down 0.1% to 341.21.
‘Solid Demand’
Dutch GDP fell 1.4% in the first quarter, the sharpest contraction in the euro area, Eurostat said today. The Italian and Finnish economies shrank 0.1 percent and 0.4%, respectively.
Still, four quarters of growth (EUGNEMUQ) 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 May 14. “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 (TKA), 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 today in a separate report.
Potential Slowdown
The economy will probably expand 0.3% in the second quarter, according to the median of 28 economists’ forecasts in a separate Bloomberg survey.
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.”
Multiple Tools
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.
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.
Bloomberg
