Euro-area economy grows faster as consumption gathers pace

[ZURICH] The euro-area economy grew faster than previously estimated at the start of the year, driven by investment and a pickup in consumer spending.

Gross domestic product rose 0.6 per cent in the first quarter, the European Union's statistics office in Luxembourg, said on Tuesday. That's the rate Eurostat initially reported on April 29 before revising growth down to 0.5 per cent on May 13.

After growing at the fastest pace in a year, the European Central Bank predicts the 19-nation economy will slow in the second quarter, with inflation rates likely to remain very low or even negative. Among the downside risks to the outlook President Mario Draghi cited last week when he kept stimulus unchanged were subdued prospects in emerging markets, slow progress in structural reforms, and the UK's June 23 referendum on whether to remain in the European Union.

"The fact that both household consumption and investments are improving is helping a more sustainable recovery in the eurozone," said Bert Colijn, senior economist at ING Bank NV in Amsterdam. "Without strengthening exports, it seems likely that the pace of growth will decline somewhat this quarter, but a moderate pace should be maintained."

Diverging paths within the bloc constitute an additional challenge for policy makers who have deployed a raft of unconventional measures including negative interest rates and asset purchases to stoke inflation.

Germany has benefited from record-low unemployment, and a drop in crude oil prices has proved a boon to disposable incomes. Business sentiment improved to the strongest level in five months in May, a sign momentum in Europe's largest economy remains strong. Yet countries such as Italy or Greece have fared less well, bedeviled by high joblessness, bad loans, and bureaucratic red tape.

In the euro area, spending in the private sector accelerated to 0.6 per cent in the three months through March from 0.3 per cent in the previous period, according to the report. Growth in government expenditure slowed to 0.4 per cent from 0.5 per cent, while gross fixed capital formation rose 0.8 per cent in the first quarter, down from 1.4 per cent. Imports outpaced exports, with net trade subtracting 0.1 per centage point from GDP.

International trade, particularly demand from China, is weighing on euro-area prospects. Policy makers in the world's most populous nation are attempting to steer the economy to growth driven by consumers and services, with officials struggling to rein in surplus production in industries from steel to coal without undermining growth and potentially harming other regional economies.

ECB officials took a more optimistic view on 2016 euro-area economic growth last week, revising their forecasts to 1.6 per cent from 1.4 per cent. They retained their estimate for 2017 at 1.7 per cent and cut the forecast for 2018 to 1.7 per cent from 1.8 per cent.

BLOOMBERG