Eurozone pins hope on long-awaited economic rebound

European Union

Eurozone politicians are hoping for glimmers of a long-awaited economic rebound this week, with growth in the single currency bloc forecast to beat both the UK and US.

Economists expect the lower oil price to have provided a fillip to eurozone growth in the opening months of the year and have pencilled in a 0.5% pick-up in GDP, according to a Reuters poll ahead of Wednesday’s figures. That would be the fastest for four years. 

Fastest growth for four years?

Eurozone GDP growth rates
Economists forecast that eurozone GDP growth will come in at 0.5% for the first quarter. That would be the fastest expansion since the start of 2011, as shown on this chart of quarterly growth rates. Photograph: Thomson Reuters

If confirmed, that solid pace of expansion for the eurozone would upset a pattern that has seen the UK outperform other leading economies.. UK growth for the first quarter came in at just 0.3%, half the pace of the 0.6% it recorded in the closing months of 2014.

There is also a good chance the eurozone managed to eclipse the world’s biggest economy, the US, where growth came to a virtual standstill in the first quarter. Winter weather was in part to blame as the annualised growth rate slid to just 0.2%.

Catching up with the US

Eurozone growth compared with the US
Economists say the eurozone quite likely outperformed the US in the first quarter. As this chart shows, eurozone growth in the fourth quarter of 2014 of 0.3% was just a shade below 0.5% growth in the US. Photograph: Eurostat

James Knightley, senior economist at ING Financial Markets, expects the eurozone figures to confirm the recovery has gained momentum.

“In fact, it could be the first time in years that the eurozone actually outperforms the US economy – at least in one single quarter,” he said.

The growth figures, which economists expect to show year-on-year expansion at 1.1%, follow an upgrade to the economic outlook from the European Commission last week. The EU’s executive described the “brightest spring in several years” for the European economy as it forecast growth of 1.5% for the eurozone in 2015, up from 1.3% pencilled in three months ago.

The commission cited cheaper oil, a weaker euro, stable global growth and support from both fiscal and monetary policies.

A pick-up in eurozone growth, from 0.3% in the final quarter of 2014, would be welcomed by the European Central Bank, which has been pumping money into financial markets in a bid to shore up the region’s fragile economy and head off the threat of deflation.

The ECB’s money printing programme, which sees it inject €1.1tn at a rate of €60bn a month into financial markets, launched in March.

While a strong GDP number on Wednesday may prompt warnings that the ECB’s quantitative easing is unwarranted, or at least too large, economists note there are plenty more clouds on the eurozone horizon.

Greece’s crisis talks with international creditors have made slow progress and fears remain high it could default on its debts, precipitating Athens’ departure from the eurozone. While the ECB has sought to downplay the potential impact of a “Grexit” on neighbouring eurozone nations, others have warned there are obvious risks. Were Greece to leave it could well undermine confidence in countries on the eurozone periphery, as well as in the single currency itself, say economists.

“The contagion risk to other economies is significant; we think that Grexit would lead to the reintroduction of a currency risk premium and higher peripheral bond yields,” said the consultancy Oxford Economics.

Growing evidence of pressures on China’s economy are also seen as a key risk to the eurozone’s prospects. Fears about the health of the world’s second biggest economy were underscored over the weekend as the central bank cut interest rates for the third time in six months.

The People’s Bank of China lowered its benchmark lending rate by 25 basis points to 5.1%, and its one-year benchmark deposit rates by the same amount to 2.25%.

“China’s economy is still facing relatively big downward pressure,” the central bank said.

Powered by Guardian.co.ukThis article was written by Katie Allen, for theguardian.com on Sunday 10th May 2015 16.20 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts