Analysts unconvinced by eurozone's growth spurt

Posted in Europe | 15-May-04 | Author: Ashley Seager| Source: The Guardian (UK)

The eurozone economy unexpectedly sprang to life in the first quarter, growing at its fastest pace in three years.
Gross domestic product for the bloc grew by 0.6% in the quarter, according to figures yesterday, leaving output 1.3% better than a year earlier.

Although analysts had expected a firm number after data this week from Germany and France, the 0.6% figure, the best since the first quarter of 2001, took them by surprise.

Most said that the pickup was due more to strength in the world economy, which has boosted eurozone exports, rather than any home-grown strength. High unemployment and weak consumer confidence have made the zone the weak spot in an otherwise healthy world recovery.

Global economic watchdog the Organisation for Economic Cooperation and Development this week forecast that the eurozone would grow by only 1.6% this year as a whole, compared with estimates of 4.7% for the United States and 3.1% for Britain.

The OECD also said the European Central Bank should cut interest rates by half a point to 1.5% to boost growth in the zone.

ECB chief Jean-Claude Trichet seemed in no hurry to heed the call after the stronger-than-expected data. "I have already said that we had confidence at our last meeting in Helsinki that we trust that the gradual recovery was materialising."

Economists were not convinced that the zone was yet in a position to establish self-sustaining growth.

"Given the strength of the global recovery, it is not surprising that the eurozone should be growing as well. But for a sustained improvement, domestic demand needs to take off too," said Julien Seetharamdoo of Capital Economics.

Separately, US data showed core inflation, which excludes volatile food and energy costs, was stronger than expected last month, picking up by 0.3% on the month and 1.8% on the year, the strongest rate since last January.

"In general, it's pretty clear price pressures have picked up. It's hard to fight the direction. This only reinforces the case for the Fed to move as soon as the next meeting," said Jim O'Sullivan, senior economist at UBS.

In further signs of the strength of the US economy, output expanded by 0.8% last month while factory utilisation rose 76.9%. Business inventories rose to a record $1,205bn as firms struggled to keep up with demand.