Euro-area economic growth picks up on fuel from German surge

[BRUSSELS] The euro-area economy picked up momentum at the end of last year as Germany reasserted itself as the driver of growth, offsetting weakness in Greece and Italy.

Gross domestic product rose 0.3 per cent in the fourth quarter after expanding 0.2 per cent in the previous three months, the European Union's statistics office in Luxembourg said Friday. Analysts surveyed by Bloomberg News predicted growth of 0.2 per cent. The Greek economy unexpectedly shrank 0.2 per cent.

While the currency bloc's economy is overcoming its longest-ever slump, falling consumer prices and the rise to power of an anti-austerity party in Greece have increased the risks to growth. To avert deflation in a region where consumer spending is bolstering the recovery, European Central Bank President Mario Draghi announced a 1.1 trillion-euro (US$1.3 trillion) quantitative-easing package that has already pushed down bond yields and the single currency.

"For the first time in two years, we can say that the region is going for solid growth," said Anna Maria Grimaldi, an economist at Intesa Sanpaolo in Milan. "The euro area is supported by the very strong tailwinds of the fall of the euro, the fall of oil price and the fall of interest rates sparked by ECB QE." The German economy, the region's largest, expanded 0.7 per cent in the fourth quarter, more than twice as much as forecast, while the French slowed in line with economists projections. The Greek economy shrank after three quarters of growth, and Italy's stagnated after two consecutive quarters of contraction.

Spain, the euro-area fourth-largest economy, reported on Jan 30 that its economy expanded at the fastest pace in seven years in the fourth quarter, with GDP rising 0.7 per cent.

In the euro area, "the bulk of fourth-quarter GDP growth is likely due to domestic demand, with private consumption growing considerably again," said Evelyn Herrmann, an economist at BNP Paribas in London. "Further consumption-growth acceleration can be expected in early 2015. Investment, meanwhile, is unlikely to have moved much in the fourth quarter." The European Commission raised its euro-area growth forecasts on Feb 5 while lowering the inflation outlook, citing the lower cost of crude oil and a weaker euro. It sees expansion of 1.3 per cent in 2015 and 1.9 per cent next year, while consumer prices will fall 0.1 per cent this year before rising 1.3 per cent in 2016.

"Recent declines in oil prices have strengthened the basis for the economic recovery to gain momentum," Mr Draghi said on Jan 22 after he pledged monthly asset purchases of 60 billion euros. "However, the euro-area recovery is likely to continue to be dampened by high unemployment, sizeable unutilized capacity, and the necessary balance-sheet adjustments in the public and private sectors." Government finances have moved back into the center of attention after newly elected Greek Prime Minister Alexis Tsipras said he no longer wants to abide by the terms of the country's bailout program. With Greece at risk of running out of cash by the end of March and its banks in limbo after the ECB turned off a key channel for liquidity supply, the country's future once again threatens growth prospects for the entire currency bloc.

Mr Tsipras said after a meeting with his European Union peers on Thursday that he sees political will to agree on what happens after the current aid program expires this month. Greece's goal remains a six-month bridge plan that would lead to a new deal with euro-area authorities, he said, while German Chancellor Angela Merkel urged Greece to move swiftly with its next request, which she portrayed as a follow-on to the existing bailout.

"Europe manages to find agreements even if it's at the last moment," Greek Finance Minister Yanis Varoufakis said early Thursday after he and his counterparts failed to reach an agreement. The Eurogroup will meet again on Monday.

"The crisis in Greece remains a risk, though so far contagion has been very limited and we expect it to eventually reach a deal," said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. "The euro-zone is likely to continue to surprise positively in 2015," as "the drop in oil prices, the lower euro and easing bank-lending conditions bode well for growth, while the ECB's QE program should improve financial conditions further."

WP