Powered by the biggest German expansion in 12 years, the European economy
shrugged off the U.S. slowdown to post first-quarter growth numbers ahead of
analyst estimates.
Gross domestic product (GDP) in the 15-country Eurozone increased
by 0.7% in the first three months of the year,
Eurostat reported. Analysts had predicted a growth
rate of 0.5%.
Germany and France - which together account for nearly half the Euro region’s
GDP - made the difference. The German economy, the continent’s largest, expanded
by 1.5% in the first quarter, compared with a growth rate of 0.3% in the final
three months of 2007. France also turned in a respectable performance, advancing
at a 0.6% clip.
Although the strong growth underscores the global economy’s resilience in the
face of a sputtering U.S. economy, and appears to justify the European’s Central
Bank’s focus on taming inflation, analysts warn the celebration may not
last.
A key cause for concern: Despite their strong performance, both France and
Germany showed signs of declining consumer demand, which is why analysts are
skeptical that such stellar growth can continue.
“A Chinese proverb says that it is better to light a candle than to curse the
darkness,” Carsten Brzeski, an economist for Dutch finance group ING Groep NV
(ADR: ING),
told Reuters.” However, at the current juncture, one
should not be blinded by the German GDP numbers.”
Indeed, earlier this month, data from Germany’s Federal Statistics Office
showed retail sales in March were down 0.1% from February, and down 6.3% from a
year earlier. Food, drink, and tobacco sales led the decline, as consumers cut
back in the face of soaring inflation. Consumer prices in April jumped 2.4%.
The story is the same for a multitude of other European nations. Eurozone
inflation backtracked slightly in the month of April, sliding to 3.3% from a
16-year high of 3.6% in March, but remained well above the ECB’s 2.0% ceiling.
“There are significant pressures facing consumers in Europe,” Howard Archer,
chief European economist at Global Insight
Inc., told Forbes.com. “Higher inflation and
soaring food prices are weighing down on consumer purchasing power in Europe. It
is a depressing factor throughout the continent.”
“Consumer confidence is weak in Europe and low spending is bound to hurt the
overall economy,” he added.
The European Central Bank (ECB) has remained hawkish on inflation, which it
considers “the main problem that we have to face in the short term.” The ECB has
held its benchmark interest rate steady at 4.0% for nearly a year now, despite
an aggressive string of rate cuts by the U.S. central bank that has left the
benchmark Federal Funds Rate at 2.0%.
Still, rising worldwide commodities prices and a weak U.S. dollar continue to
drive up inflation throughout the Euro region.
The European Commission (EC), the executive branch of the European Union,
said last month that Eurozone growth would continue to erode throughout 2008 and
2009.
The EC predicted the combined growth rate for the 15 countries that use the
euro would slow to 1.7% this year and 1.5% next year. It was second time in six
months that the commission has reduced its growth estimate for the region. In
November the group was projecting growth of 2.2%.
According to the EC, “the recent sharp rises in food and energy prices have
depressed households’ purchasing power and consumer spending in the last quarter
of 2007 and are expected to continue to do so during most of 2008.”
If the Eurozone does lose its momentum in the months ahead, the ECB could
find itself in a precarious position, as abiding inflation might keep the bank
from cutting rates to spur growth.
“There is definitely no room for the ECB to cut rates,” Joerg Kraemer, chief
economist at Commerzbank AG (OTC: CRZBY) in
Frankfurt told Bloomberg News.
