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Germany propels eurozone growth to 0.3% -Dlight News

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The eurozone economy grew faster than forecast in the first quarter as Germany bounced back, helping the region to emerge from its recent stagnation.

Eurozone gross domestic product expanded at a quarterly rate of 0.3 per cent in the three months to March, according to data released on Tuesday. That is its fastest rate since the third quarter of 2022 and an improvement from a contraction of 0.1 per cent in the final quarter of last year. Economists had forecast 0.1 per cent growth in a Reuters poll.

Germany’s economy grew at a quarterly rate of 0.2 per cent in the three months to March, in a marked rebound from a 0.5 per cent contraction in the previous quarter in Europe’s largest economy.

Data also published on Tuesday showed that eurozone headline inflation remained steady at 2.4 per cent for April, after a 17-month period in which it had fallen almost continuously.

But core inflation — excluding energy and food prices — continued to fall from 2.9 per cent to 2.7 per cent, in a reassuring sign for investors hoping the European Central Bank will start cutting interest rates in June.

Line chart of Harmonised index of consumer prices (annual % change) showing Eurozone inflation stalls even as services prices slow

The euro and eurozone bond yields edged higher following the slightly stickier than forecast core inflation data. The currency was 0.1 per cent higher against the dollar at $1.0726. Ten-year German yields, which move inversely to bond prices, were up 0.03 percentage points at 2.55 per cent.

Analysts said the figures were unlikely to deter the ECB from starting to lower borrowing costs at its next policy meeting on June 6, especially as the stronger growth indicates an improvement in productivity — output per hour worked — which will help absorb rising wages.

“Growth is clearly coming back,” said Tomasz Wieladek, an economist at investor T Rowe Price. “The productivity revival clearly means that the ECB can cut, even if wage growth doesn’t fall below 3 per cent.”

Germany’s federal statistical agency attributed the recovery in growth to higher investment and exports, which offset lower household spending, helping it to outstrip the 0.1 per cent expansion forecast by economists in a Reuters poll.

“The German economy found its footing at the start of the year, though this has to be seen in the context of a downward revision to fourth-quarter growth,” said Claus Vistesen at Pantheon Macroeconomics.

France, Spain and Italy also reported higher than expected GDP figures on Tuesday, indicating a broad-based upturn that lifted output in most eurozone members.

The eurozone economy has barely grown for the past 18 months, hit by the fallout from the coronavirus pandemic, Russia’s full-scale invasion of Ukraine and the subsequent energy crisis after Moscow cut gas exports. But growth in the bloc is expected to pick up further this year as inflation slows and wages rise, boosting household spending power.

Domestic consumption is also being supported by recent reductions in borrowing costs by banks in anticipation of summer rate cuts.

French GDP expanded 0.2 per cent in the first quarter, according to official figures also published on Tuesday, ahead of forecasts for 0.1 per cent growth. Insee, the French statistics agency, attributed the jump to higher government and household spending and rising investment.

Italian growth accelerated to 0.3 per cent, lifted by a positive contribution from foreign trade, which offset a drag from domestic demand, according to the national statistics office. Economists had forecast first-quarter growth of 0.1 per cent.

One of Europe’s strongest performers continued to be Spain, which exceeded expectations with GDP growth of 0.7 per cent in the first three months as a result of rising domestic and external demand. Economists had expected an expansion of 0.4 per cent.

Consumer spending rose sharply in France and Germany at the end of the first quarter, according to separate data released on Tuesday. French retail sales increased 0.4 per cent in March, while in Germany they were up 1.8 per cent, rebounding from a 1.9 per cent decline in February to achieve the strongest monthly growth for almost a year.

However, analysts worry that France’s efforts to reduce its stubbornly high budget deficit could weigh on the economy this year. Vistesen warned that consumer spending would slow “as household sentiment and purchasing intentions are curbed by threat of a tax increase to rein in the deficit”.

Additional reporting by Philip Stafford in London

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