Dutch Surge Aids Eurozone Recovery -- Update

The Dutch economy enjoyed an export boom that helped drive an acceleration in eurozone growth during the three months to June, a sign that the currency area's recovery is becoming more broad based and less reliant on Germany and Spain.

The eurozone pickup has come at an opportune time for the global economy, since U.S. activity has been slightly weaker than expected.

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 an anticipated rise in energy prices and heightened political uncertainty as voters in the Netherlands, France and Germany chose new governments.

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 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, 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 was also supported by slightly stronger growth in Italy, which recorded a second 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.

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.

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. On a quarter-to-quarter basis, the economy grew by 0.6%, up from 0.5% in the three months through June.

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 06:17 ET (10:17 GMT)