Eurozone Resumes Growth in First Quarter Despite War on Borders

the East

The Eurozone may have resumed growth in the first quarter as the four largest economies proved resilient enough to weather the fallout from the ongoing war on the region’s borders.

According to the median of 31 forecasts for data due out on April 28, the currency area’s gross domestic product increased by 0.2% after stagnating in the final months of 2022.

Economists believe that both Germany and Italy have succeeded in touching growth during that quarter after previous contractions. Meanwhile, France and Spain are expected to continue to grow.

This overwhelmingly positive result clearly reflects the fact that the eurozone, supported by government aid to businesses and consumers, has weathered the cost of living crisis and strike unrest in France and Germany to defy the gloomy outlook for a depressed winter in the region.

In conjunction with purchasing managers’ numbers showing continued momentum in the current quarter, the data may encourage European Central Bank officials to continue raising interest rates to curb inflation after global banking tensions prompted caution when approving their policies.
In a sign that the Bank’s officials may not be done yet, growth figures are set to be released next week in conjunction with April consumer price reports from three of the largest countries.

Inflation exceeds the “central” target
Economists expect core inflation, as measured by EU standards, to remain steady at 7.8% in Germany and 6.7% in France, while it may accelerate to 3.8% in Spain. Such results would be well above the ECB’s 2% target. Data for Italy and the Eurozone will be released the following week.

“The resilience of the economy means that continued labor market tightening will keep core inflation at a higher level for longer,” Bloomberg Economics said in a report.

Growth data due next Friday will also include numbers from Austria, Belgium and Portugal, but Germany is likely to get the most attention.

Less than six months ago, Europe’s largest economy was expected to suffer the worst recession in the region. Now such a recession may have been averted, as German central bank officials recently predicted a recession in the first quarter, and even estimates from a group of leading institutions point to a return to growth.

Other economies may also perform better than expected. The Bank of France this month raised its growth estimate for the past quarter, counting on stronger-than-expected activity outweighing the downturn caused by strikes and protests over the pension law.

The Bank of Italy believes its economy may have returned to “modest” growth, according to statements attributed to lawmakers this week. In Spain, officials say growth exceeded expectations in the first quarter.

Growth prospects in the Eurozone may now be more positive going into the second quarter after purchasing managers’ indices in both Germany and France beat economists’ expectations with a jump in private sector output.

Such a backdrop may encourage the ECB to continue raising interest rates on May 4 to a level not yet determined by officials, with the possibility of further increases after that.

While Bank of Italy Governor Ignazio Fiesco called for caution amid a credit slowdown, fellow Dutch central bank governor Claes Nott openly asked whether borrowing costs should continue to rise in June and July.