Eurozone GDP: Germany Grows, France Stalls in Mixed Picture for Largest Members

15/5/2014

Germany Is Main Driver as France, Italy and the Netherlands Continue to Struggle

Germany was once again the main driver of modest growth in the euro zone as the economies of Italy and the Netherlands contracted, while France's stagnated.

The currency area's continued reliance on its powerhouse underlines the fragility of its recovery, which began in the second quarter of last year but has struggled to gain momentum.

The euro zone's two core economies were on widely divergent trajectories at the start of 2014, with Germany's economy surging head as French economic growth ground to a halt.

Adding to a very mixed picture for the euro zone's largest members, the Netherlands experienced a sharp economic contraction in the first quarter, although that may be transitory and largely due to a very mild winter across Europe. The Netherlands is one of the largest gas-producing countries in Europe and harsh winter weather usually provides a boost to its export-oriented economy.

Figures released earlier recorded a pickup in growth in Spain. But for members of the European Central Bank's governing council, the weakness and narrowness of economic growth in the first quarter will likely underline the need for further stimulus as they prepare for their next meeting in early June.

The ECB's vice president said Thursday that it is open to further monetary easing to prevent the euro zone from stagnating under an extended period of low inflation.

"We are determined to act swiftly if required and don't rule out further monetary policy easing," Vitor Constancio said in a speech in Berlin.

The contrast in economic performance with Germany will add to already growing pressure on French President François Hollande.

After increasing taxes sharply in the first 18 months of his presidency, the Socialist leader changed his approach in January, pledging to slash spending instead and cut taxes for business in a bid to get them to invest and recruit.

Germany's statistics agency Thursday said that in the three months to March, gross domestic product was 0.8% up on the last three months of 2013. That was the most rapid expansion since the first quarter of 2011, and double the rate of growth recorded in the final quarter of last year.

De Statis said domestic consumption was the main driver of growth, and particularly spending by households and the government. Foreign trade put a damper on growth, and preliminary calculations show exports fell while imports picked up.

That rebalancing of demand may placate some critics of Germany's growth model, who have long complained it has been overly reliant on exports, while its weak domestic spending has held back both the euro zone and global recoveries.

By contrast, French consumers tightened their belts and companies cut back on investment, data showed Thursday, indicating the wider euro zone recovery remains weak and vulnerable to setbacks.

In the first three months of 2014, the euro zone's second-largest economy failed to grow on a quarter-on-quarter basis, data from the French national statistics bureau, Insee showed. The French economy had grown 0.2% in the final quarter of last year and economists polled by The Wall Street Journal expected a slightly smaller slowdown to 0.1% growth in the first quarter.

Economists had expected Italy's economy to grow by 0.2%, an acceleration from the 0.1% expansion recorded in the previous quarter, Instead, it contracted by 0.1%.

The euro zone exited a long contraction in the second quarter of last year, but growth hasn't been as strong in past economic recoveries and too sluggish to quickly bring unemployment down from record highs. Alongside weak growth, the annual rate of inflation has been below 1.0% since October, and well below the European Central Bank's target of just under 2.0%. The ECB indicated last week that it is preparing to cut interest rates or take other stimulus measures when its governing council next meets in June.

In France, the economy escaped the deep contraction of the wider eurozone. But it has fluctuated between contractions and slight growth every quarter over the last two years, scuttling Mr. Hollande's pledge to get unemployment to start falling.

The GDP figures from Insee on Thursday indicate that Mr. Hollande's policies still haven't had an impact as investment by nonfinancial companies fell 0.5% in the first quarter from the previous quarter.

Consumer spending, which has steadied the French economy during the euro zone slump, also fell 0.5% over the same period, indicating rising unemployment and sales tax increases are weighing on households.

Elsewhere in Europe, growth was mixed in the first three months of the year. Within the euro zone, Austria slowed, with its economy expanding by 0.3% compared with a 0.4% rate of growth in the fourth quarter of last year.

The Austrian Institute of Economic Research, known by its German acronym WIFO, described that performance as "only very feeble," and said growth was almost entirely driven by exports.

By contrast, Slovakia's economy accelerated slightly, recording growth of 0.6%, up from 0.5%.

Outside the euro zone, the Czech Republic stagnated, while Romania's economy slowed sharply, albeit from a very strong end to 2013.

Hungary's economy grew by 1.1% during the quarter, a pickup from the 0.7% rate of growth recorded at the end of last year and the fastest expansion recorded in Europe so far.

Among those countries for which data is available, the Netherlands was by far the worst performing economy in Europe during the first quarter. Its GDP shrank by 1.4%, more than reversing a 0.9% expansion in the final three months of last year.

That may not mark the end of the recovery that began in the second quarter of last year, however. The Dutch statistics agency said business investment and industrial production continued to pick up, and weather effects won't have as large an influence in the second quarter.

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