Eurozone Growth Spreads, Helped by Dutch, Italian Economies -- 3rd Update

By Paul Hannon Features Dow Jones Newswires

The eurozone's recovery was more rapid than first estimated in the three months to June as a pickup that started in Germany and Spain has spread to other parts of the currency area, aiding a comeback that is proving vital to the world economy.

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The European Union's statistics agency Wednesday raised its measure of eurozone economic growth during the second quarter to 2.5% annualized from its first estimate of 2.3%, bringing it closer to the 2.6% recorded by the U.S., which it outpaced in the first quarter.

That upgrade comes at an opportune moment, since the U.S. is growing more weakly than expected and there are signs China may be set for a slowdown.

Separate figures showed the Dutch economy surged during the period as exports jumped, while Italy recorded its strongest six months since the second half of 2010.

"The eurozone recovery continues, and seems to be broadening out," said Fabio Balboni, an economist at HSBC.

The bloc's strength during the first half of 2017 has come as a surprise to most economists, who had expected growth to slow in response to rising energy prices and heightened political uncertainty as voters in the Netherlands, France and Germany chose new governments.

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However, the rise in energy prices didn't last long and elections in the Netherlands and France--in March and May respectively--produced wins for pro-euro centrists and reduced the threat of a breakup of the currency area. German Chancellor Angela Merkel has a large lead in opinion polls ahead of September's elections.

As Dutch Prime Minister Mark Rutte worked to form a new government, the country's economy surged in the second quarter, recording its fastest expansion since the final three months of 2007. According to the Dutch statistics agency, gross domestic product--the broadest measure of the goods and services produced by an economy--was 1.5% higher than in the three months through March and 3.8% up on the comparable period a year earlier. That was largely the result of a jump in exports, with overseas sales 11% higher in June than a year earlier.

As a result, the Dutch economy overtook Spain's as the fastest-growing of the eurozone's five largest members. It had previously enjoyed steady if modest growth, expanding by 0.6% in the first quarter.

The CPB Netherlands Bureau for Economic Policy Analysis said Wednesday it now expects the Dutch economy to grow by more than 3% in 2017 as a whole, the first year in which it will have done so since the financial crisis.

"The Dutch economy is well on the rise," the body said in its new report.

The eurozone's pickup has also been supported by slightly stronger growth in Italy, which recorded a third straight quarter in which GDP rose by 0.4%. Compared with a year earlier, the Italian economy was 1.5% larger, the fastest rate of expansion since the first three months of 2011.

"The Italian economy, which admittedly is still one of the weakest, is finally showing signs of life," said Shweta Singh, an economist at Lombard Street Research.

Despite the steady growth, Italy's economy is still 6.5% smaller than it was before the financial crisis. Only Greece, with an economy that is 27% smaller, has performed worse in the past 10 years.

Spain and Germany were largely responsible for driving the eurozone's modest growth between the start of the recovery in mid-2013 and the end of 2016. But the broadening of the recovery in 2017 has contributed to its acceleration.

Eurostat didn't give details of the drivers of eurozone growth, but economists say national data releases suggest consumer and investment spending were the main factors, with exports playing a lesser role, except in the Netherlands and France.

The strength of the eurozone economy has prompted economists to raise their forecasts for the year as a whole. According to Consensus Economics--which tracks forecasters--the average growth rate for this year projected by the 29 institutions it follows is now 2%, up from the 1.4% expected in December.

The eurozone's acceleration has fueled expectations the European Central Bank will start to wind down its purchases of government bonds from January. However, there are few signs the pickup in growth has transformed the outlook for inflation, which is well below the ECB's target of just under 2%.

"With the economy maintaining a healthy pace of growth, the ECB should feel fairly confident about tapering its asset purchases next year," Jessica Hinds, an analyst at Capital Economics, said. "But with GDP growth yet to boost inflation meaningfully, we doubt the bank will raise interest rates until early 2019."

There are signs the eurozone's pickup is aiding other parts of Europe with which it has close trade and financial ties.

The Czech economy was 2.3% larger in the second quarter than the first, while Sweden's economy grew by 1.7%. Earlier in August, the Czech central bank raised its key interest rate for the first time in nearly a decade, a milestone for Europe's central banks that have taken dramatic easing steps to prop up their economies.

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

(END) Dow Jones Newswires

August 16, 2017 08:47 ET (12:47 GMT)