Drag in euro zone recovery supports call for ECB action

Wednesday 04 June 2014 17.21
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The euro zone economy expanded by just 0.2% in the three months to March
The euro zone economy expanded by just 0.2% in the three months to March
Markit's Composite PMI, widely seen as a good gauge of euro zone growth, dipped to 53.5 in May
Markit's Composite PMI, widely seen as a good gauge of euro zone growth, dipped to 53.5 in May

New data has confirmed a slowdown in the euro zone's economic recovery in the first quarter, likely reinforcing calls for bold action by the European Central Bank this week to fight low inflation and high unemployment. 

The euro zone economy expanded by just 0.2% in the three months to March, the EU's statistics office Eurostat said, illustrating the fragility of the rebound.  

Analysts surveyed by Reuters expected the €9.5 trillion economy to expand by 0.4% on the quarter in the three months from January to March. 

Euro zone inflation has been stuck in the European Central Bank's "danger zone" of below 1% since October and coupled with weak growth poses a risk for the recovery. 

Growth in the first quarter rise was mainly due to Germany, which compensated the stagnation in France and the shrinking output in Italy, the Netherlands, Portugal and Finland. 

The quarterly rise was driven mainly by change in inventories, along with domestic and government consumption and exports. Imports did little to help the euro zone economy. 

When compared with the same time last year, the euro zone economy grew by 0.9%, its second consecutive annual expansion after a 0.5% increase in the last quarter of 2013. 

Germany, the euro zone's largest economy, grew by a sound 0.8% in the first quarter, with economists expecting pace of the expansion to slow in the coming months. 

ECB policymakers have flagged a policy move for their meeting tomorrow and the bank's president, Mario Draghi, said last week the ECB was well equipped to get inflation back to its target - just below 2%. 

Separately, Eurostat data showed that industrial producer prices, a proxy for consumer price inflation, fell as expected both on the month and year on year in April. Prices at factory gates in the euro zone slid 0.1% on the month in April after a 0.2% drop in March, showing the fourth consecutive monthly decline in a row. 

Out of the bloc's five largest economies, Germany, France, Italy, Spain and the Netherlands, only Spain saw prices going up month-on-month by 0.2%. 

When compared with the same period last year, producer prices fell by 1.2% in April, slowing from a 1.6% drop in March.

Euro zone business growth eases in May

Euro zone business growth eased in May and firms cut prices for the 26th month in a row, an earlier survey showed today.

While output across the region remained solid, supported once again by Germany and pointing to euro zone GDP growth of 0.4-0.5% this quarter, French business activity slipped back into contraction after just two months of growth. 

Similarly, accelerating growth in the service industry was offset by an easing in manufacturing. 

"Although the euro zone is enjoying its best performance for three years, this is an uneven, stuttering and lacklustre recovery," said Chris Williamson, chief economist at survey compiler Markit. 

Markit's Composite PMI, widely seen as a good gauge of growth, dipped to 53.5 in May, just under a flash reading of 53.9 and below April's final 54. But it held above the 50 mark dividing growth from contraction for the 11th month running. 

The slowdown in growth came despite firms again cutting their prices. The output price index nudged up to 48.8 from 48.7 but has held below the break-even mark since April 2012. 

"The overall rate of growth is just not strong enough to allow firms to push through price hikes. This is perhaps the final nail in the coffin for hopes of a robust recovery without stimulus," Williamson said. 

ECB policymakers have flagged a policy move for their meeting tomorrow and sources told Reuters last month the bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs). 

Euro zone price inflation fell unexpectedly in May, coming in at just 0.5%, official data showed yesterday, increasing the risks of deflation in the currency area and all-but sealing the case for the ECB to act this week. 

Meanwhile, the index for the euro zone's vast service industry rose to a near three-year high of 53.2 in May from 53.1 in April as new business came in at its fastest pace since mid-2011, with the related subindex rising to 52.8 from 52.3.