Not the weak link now: Eurozone outpaces the US and UK in Q1

Not the weak link now: Eurozone outpaces the US and UK in Q1

LONDON — The eurozone, for so long a laggard in the global economy, outpaced the United States in the first quarter of the year and is widely expected to pick up further steam in the months ahead.

The single currency bloc of 19 European countries expanded by a solid, if unspectacular, quarterly rate of 0.5 per cent in the first three months of the year.

The increase reported Wednesday by statistics agency Eurostat was in line with expectations but may prove a slight disappointment to some in the markets following a run of other strong data. A number of economists had predicted a pick-up in the rate of growth from the previous quarter’s 0.5 per cent.

Still, the eurozone grew faster than the U.S. economy, which during the first quarter expanded by 0.7 per cent on an annualized basis, way below the eurozone’s equivalent rate of about 2 per cent.

The eurozone economy has been expanding steadily since 2013 but has failed to push into a high gear, largely because it battled with sky-high debts in many countries, notably Greece.

No country breakdown was provided by Eurostat on Wednesday but surveys have shown that the recovery is becoming broader-based across sectors and countries. Germany, the eurozone’s biggest economy, remains the fulcrum and its sustained economic expansion is expected to continue through to the country’s general election later this year.

A string of general elections in key eurozone states has been identified as a potential risk to economic growth this year, as populist or extremist parties could endanger the region’s commitment to the euro. So far, defeats for populist politicians in Austria and the Netherlands have shored up confidence in the markets that there won’t be a lurch toward a breakup of the single currency or of the wider European Union itself.

There are hopes that the eurozone will pick up further steam in the second quarter following recent surveys indicating an uptick in April, particularly in France. The prevailing view in the markets is that a victory in Sunday’s presidential election for centrist Emmanuel Macron over Marine Le Pen from the far-right could further boost the eurozone’s second-biggest economy.

Once the French election is out of the way, the European Central Bank could start considering when to rein in its stimulus measures. The bank has slashed interest rates, including its main one to zero, and embarked on a massive government bond-buying program to get inflation to its goal of just below 2 per cent. Figures released last week showing inflation at 1.9 per cent have ratcheted up expectations that the bank will soon be ready to consider easing off the stimulus.

“Better economic data in the eurozone suggests that over the next few months it is likely that the debate over a potential reduction in ECB stimulus will evolve,” said Jane Foley, a senior strategist at Rabobank International.

Though all indications are that the eurozone is gaining momentum, the outlook will remain vulnerable to any fallout from Britain’s upcoming departure from the EU. Britain is the single biggest export market for eurozone firms and a failure to conclude a trade deal could stoke uncertainty across Europe.

In March, before calling a general election, Prime Minister Theresa May triggered the formal two-year Brexit process.

There are already signs that worries over Britain’s future are hurting the country’s economy — growth slowed to 0.3 per cent in the first quarter of the year from 0.7 per cent in the previous three-month period.

Growth in Britain is widely expected to remain soft as it negotiates its EU exit. The economy is expected to be hobbled by uncertainty — both businesses and consumers may put off spending until they know how the post-Brexit environment looks. And the pound’s sharp fall since last June’s Brexit vote has pushed up prices, which is weighing on consumers at a time when wage increases are modest.

“With Theresa May vowing on Tuesday that she will be a ‘bloody difficult woman’ in Brexit talks adding to anxiety, a rocky road filled with obstacles may lie ahead,” said FXTM Research Analyst Lukman Otunuga.

Pan Pylas, The Associated Press