Eurozone's Economy Continued to Grow in the First Quarter--Update

By Paul Hannon Features Dow Jones Newswires

The eurozone economy grew at a steady pace in the first three months of the year as businesses and households appeared undaunted by high levels of political uncertainty ahead of a series of high stakes elections.

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The European Union's statistics agency Wednesday said the combined gross domestic products of the currency area's 19 members was 0.5% higher than in the final three months of 2016, and 1.7% higher than in the first quarter of that year.

That was equivalent to an annualized growth rate of 1.8%, stronger than the 0.7% expansion recorded by the U.S. and the 1.2% expansion recorded by the U.K. during the same period. It is the fourth straight year in which the eurozone has outpaced the U.S. economy in the first quarter, although it has seldom managed to hold on to that advantage as the year progresses.

Ahead of Wednesday's release, national figures showed the French economy slowed to grow at a 0.3% pace in the first quarter, while Spain's economy accelerated to 0.8%. On the basis of the eurozone figure, economists estimate that figures to be released next week will show the German economy grew at a 0.7% rate.

Surveys of businesses and households indicate that the eurozone economic growth is set to pick up slightly this quarter, and policy makers at the European Central Bank have adopted a more optimistic tone since the start of the year. Speaking Thursday, ECB President Mario Draghi said the recovery had become more "solid."

Many economists had expected confidence to weaken this year, as political parties hostile to the euro and the wider European Union looked set to gain ground, and possibly triumph. Meanwhile, the depreciation of the British pound in the wake of a June vote to leave the EU had been expected to weaken eurozone exports to one of its largest overseas markets.

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However, confidence has strengthened this year, with a European Commission measure of household and business sentiment hitting its highest level in almost a decade during April. March elections in the Netherlands saw Prime Minister Mark Rutte defeat anti-euro populist candidate Geert Wilders. The quarter ended before centrist candidate Emmanuel Macron won the most votes in the first round of France's presidential election, ahead of Marine Le Pen, who opposes membership of the EU and the eurozone. Opinion polls suggest Mr. Macron will triumph in the second round, to be held May 7.

"Although political and policy uncertainty remains relatively high, it has as yet failed to have any meaningful adverse impact on business confidence and/or financial markets," economists at Barclays wrote in a note to clients.

The deepening of the eurozone's recovery over the past six months has prompted German politicians to call for a winding down of the ECB stimulus measures that have been launched since mid-2014, when the currency area seemed at risk of a slide into chronic deflation.

Central bankers have said it would take some time before growth at current rates eats into spare capacity and ensures that the eurozone's inflation rate stays at the ECB's target.

Figures also released Wednesday underlined their caution, with Eurostat reporting that the prices of goods leaving the currency area's factory gates fell 0.3% in March from the previous month, the first decline since August and the largest since April 2016.

For all its resilience in the face of headwinds, the eurozone has some distance to go before it has fully repaired the damage done by the global financial crisis, and its own problems of high levels of debt and weak banks. Construction remains below precrisis levels, as does business investment, while the jobless rate is more than twice that in the U.S.. Economists assess the eurozone's growth potential--or the rate it can sustain over the long term without generating excessive inflation--at just 1%.

Furthermore, ECB policy makers continue to stress that economic growth is more likely to disappoint expectations than exceed them, pointing to a number of threats from outside the currency area, including negotiations that will set the terms of the U.K.'s departure from the EU, uncertainty about the economic policies of U.S. President Donald Trump, and the performance of the Chinese economy.

Away from Germany, other eurozone governments have signaled they are willing to give the ECB time.

"I understand the central bank, that unless they are 100% sure that we've come out of the woods, it's no use, really, to start tightening," Maltese Finance Minister Edward Scicluna told The Wall Street Journal in an interview Tuesday. "I'm more patient. I'm more patient, ready to wait."

--Todd Buell in Frankfurt contributed to this article

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

May 03, 2017 07:36 ET (11:36 GMT)