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Eurozone Poised for Higher Growth in First Quarter

  • Associated Press

People queue outside a government-run job centre in Madrid, Spain, April 27, 2016.

People queue outside a government-run job centre in Madrid, Spain, April 27, 2016.

With a heated debate raging over the merits of the European Central Bank's stimulus measures, it's been easy to overlook the fact that the eurozone economy has been growing steadily for a couple of years now — and looks poised to keep expanding in 2016.

Policymakers at the ECB, which have recently had to defend their stimulus policies against criticism from German politicians, will be hoping that a raft of economic figures due Friday show that their measures are bearing fruit.

As well as inflation and unemployment figures, the European Union's statistic agency will release a preliminary estimate of quarterly growth across the 19-country single currency bloc during the first quarter. The consensus among analysts is that it accelerated to 0.4 percent in the January-March period from the previous quarter's 0.3 percent, even though much of the period was dominated by market volatility and uncertainty over the slowdown in China.

Some economists even think the growth rate could have doubled to 0.6 percent thanks to much stronger industrial production, particularly in January, solid retail sales and new car registrations.

"The strength of the available hard data for the first quarter suggests that GDP growth will have re-accelerated in the first quarter,'' said James Nixon, chief European economist, who is expecting growth of 0.5 percent. "While this is a touch above the consensus expectation, we would certainly not rule out an even stronger rise.''

The eurozone has benefited from a number of factors over the past year, not least the fall in oil prices, which helps an economy that is a net importer of crude. The fall in the value of the euro has helped the region's exporters, particularly in Germany. And less stringent budgetary policies by government have also freed up resources in some of the region's debt-laden economies.

The expectation is that the eurozone will continue to record solid, if unspectacular, levels of growth over the rest of the year. A survey of economic sentiment across the region published Thursday by the European Commission, the EU's executive arm, pointed to a further pick-up in April, with confidence improving across an array of sectors.

The outlook for the economy has brightened over the past couple of months as the mood in financial markets has turned less febrile. The ECB will also hope that its series of stimulus measures in March, including the reduction in its main interest rate to zero and a further expansion in the bond-buying program, will galvanize business activity even more.

"Looking ahead, we expect the economic recovery to proceed,'' ECB President Mario Draghi said after last week's policy meeting. He noted an improvement in lending — a key metric for the ECB — since the decision in March to step up the stimulus programs.

For a region that's swung from one crisis to the next over the past eight years, risks remain. The biggest include a British vote on June 23 on whether to leave the European Union, renewed concerns over Greece's bailout program and its future in the euro and the upcoming Spanish general election. From outside the region, the key risks are the consequences of a slowing Chinese economy and the swings in oil prices.

``Risks relative to our upbeat forecast are biased to the downside as economic policy capacity to ease further is limited and political risks are high,'' said Xavier Chapard, global macro strategist at Credit Agricole.

One big risk facing the eurozone economy is too-low inflation. Figures due Friday are set to show that the annual inflation rate was unchanged at zero in April. The ECB, whose primary goal is to keep inflation just below 2 percent, has been worried that low or subzero inflation could lead to deflation, a long-term drop in prices that would weigh on the already-fragile eurozone economy.

A consistent drop in prices can choke the life out of an economy by enticing consumers to delay big purchases beyond everyday needs in the knowledge that they will cost less down the line.

And faced with lower prices, businesses also make less profit and start looking to reduce costs. That means job losses, wage cuts and a reluctance to invest and innovate. That hurts the economy further, potentially creating a downward spiral in which businesses have to cut costs further.