Euro Zone GDP Contraction slows in 1Q

The pace of the euro zone's economic contraction slowed quarter-on-quarter in the first three months of this year, EU statistics showed on Wednesday, but retail sales in April pointed to continued weakness in household demand.

The European Union's statistics office confirmed its earlier estimates that gross domestic product in the 17 countries using the euro fell 0.2% quarter-on-quarter in the January-March period, for a 1.1% year-on-year contraction.

That came after a 0.6% decline in euro zone quarterly output in the previous three months.

"The euro zone remains stuck in recession, despite some signs that the recession is easing a bit," said Jonathan Loynes, chief European economist at Capital Economics.

The smaller fall in the first quarter of 2013 was mainly thanks to a stabilisation of inventories and household demand, which, unlike in the previous three months, did not weigh down the overall result.

But retail sales data, a proxy for consumer demand, fell more than expected in April, pointing to continued weakness of private consumption at the start of the second quarter.

Economists said that was to be expected given record high unemployment of 12.2%.

"Consumers are still doing little to help the euro zone return to growth, which is little surprise given the pressure they are under in a number of countries from high and rising unemployment and limited purchasing power," said Howard Archer, economist at IHS Global Insight.

Retail sales in the euro zone fell 0.5% month-on-month in April for a 1.1% year-on-year decline. Economists polled by Reuters had expected only a 0.1% monthly fall and a 0.8% annual contraction.

TRADE HELPS

Eurostat GDP data showed there was a 0.1 percentage point positive contribution to the overall result from euro zone net trade in the first three months of the year - but only because imports declined more than exports, another signal of very weak domestic demand.

The positive net trade was, however, more than offset by a sharp fall in investment, which subtracted 0.3 percentage points from the overall final figure, leaving it at -0.2%.

The contribution from government spending, constrained by fiscal consolidation to regain market confidence in euro zone public finances, was zero, for the third quarter running.

Economists noted that private investment, especially in southern Europe where the recession was the deepest, was constrained by expensive credit to companies, as banks there are reluctant to lend to firms despite record low ECB lending rates.

Such tight credit conditions in the south of the continent are now a top policy challenge for the euro zone.

The European Commission expects the euro zone to start growing again on a quarterly basis already from the second quarter, with a 0.1% quarterly expansion forecast.

And the European Central Bank also expects the euro zone to start growing later this year.

"The economic situation in the euro area remains challenging but there are a few signs of a possible stabilisation, and our baseline scenario continues to be one of a very gradual recovery starting in the latter part of this year," ECB President Mario Draghi said on Monday.

But economists were less upbeat.

"We don't really think there will be a gradual recovery in the second half of the year. The ECB's view is optimistic, this is mainly based by expectation of external developments in the world," said Capital Economics' Loynes.

"The reality is that a large chunk of the euro zone is stuck in recession because of the combination of impacts of the fiscal consolidation combined with structural deficits in competitiveness," he added.