Euro Zone Turns Page on War With Growth Seen Returning

The euro zone probably resumed growth in the first quarter as all four of its biggest economies proved resilient enough to shake off the fallout from war on the region’s frontier.

(Bloomberg) — The euro zone probably resumed growth in the first quarter as all four of its biggest economies proved resilient enough to shake off the fallout from war on the region’s frontier.

Gross domestic product in the currency area rose 0.2% after shrinking slightly in the final months of 2022, according to the median of 31 forecasts for the data due April 28.

Economists reckon both Germany and Italy succeeded in eking out expansions during the quarter after prior contractions. Meanwhile France and Spain are expected to have kept growing.

Such a clean sweep of positive outcomes would underscore how the euro area, supported by government aid to businesses and consumers, weathered the storm of a cost-of-living crisis and strike disruptions in France and Germany to defy grim predictions for a winter recession in the region. 

Combined with purchasing-manager figures showing momentum continued into the current quarter, the data may embolden European Central Bank officials to keep hiking interest rates to quell inflation after global banking tensions injected caution into their policymaking.

Potentially illustrating how their job is unfinished, next week’s growth numbers will be accompanied by consumer-price reports for April from three of the largest countries. 

Headline inflation measured by European Union standards is expected by economists to have held at 7.8% in Germany and 6.7% in France, while possibly even accelerating to 3.8% in Spain. Such results would all be far above the ECB’s 2% goal. Data for Italy and for the euro region will be released the following week.

“A resilient economy means lingering labor-market tightness will keep underlying inflation higher for longer,” Bloomberg Economics wrote in a report. 

The growth numbers to be released next Friday will also include numbers from Austria, Belgium and Portugal. They will show how the euro zone fared after a 0.1% contraction in the fourth quarter, revealed last week in a downward data revision by Eurostat.

Germany’s report is likely to draw the greatest focus. Less than six months ago, Europe’s biggest economy was expected to suffer the region’s worst recession. Now such a slump may have been averted, with Bundesbank officials recently anticipating stagnation in the first quarter, and a panel of leading institutes even reckoning on a return to growth. 

Other economies may also be performing better than forecast. The Bank of France this month raised its estimate for growth in the past quarter, reckoning stronger-than-expected activity more than offset the drag from strikes and pension protests.

Meanwhile the Bank of Italy reckons the economy there probably returned to “modest” growth, according to comments to lawmakers this week. And in Spain, officials say growth there also beat expectations in the first quarter.

The euro zone’s growth prospects may now be brightening further as the second quarter proceeds. Purchasing manager indexes for Germany and France both exceeded economists’ forecasts as private-sector output jumped.

Such a backdrop may encourage the ECB to carry through with a rate hike on May 4 of a size that officials have yet to determine, perhaps with more to come after that. 

While Bank of Italy Governor Ignazio Visco is calling for prudence amid a credit slowdown, his Dutch colleague Klaas Knot has already wondered aloud if borrowing costs should keep rising in June and July.

–With assistance from Alexander Weber, Alessandra Migliaccio and Alonso Soto.

(Corrects second and ninth graphs and chart to show euro-area economy contracted in fourth quarter)

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