The euro zone economy grew at its fastest quarterly pace in three years in the first quarter of this year and could expand even more quickly in the months ahead, according to official reports released on Friday. The bloc grew by 0.6 percent in the first three months of 2004 compared with the previous quarter and by 1.3 percent from a year earlier, the EU statistics agency Eurostat said. That beat consensus forecasts, even after they had been revised up in the light of national data. It was the fastest quarterly growth rate since the first quarter of 2001 and the best annual showing since the third quarter of the same year. While record oil prices are causing some economists to fret about the outlook for euro zone growth and inflation, a European Commission model, which forecasts quarterly change in euro zone gross domestic product, said growth might even pick up further.
It predicted the euro zone economy would grow by between 0.3 and 0.7 percent in the second quarter, unrevised from an earlier release, and by between 0.4 and 0.8 percent in the third quarter, higher than a previous forecast of 0.3 to 0.7 percent. "It's a positive reading. It suggests growth has remained relatively upbeat," said Mitul Kotecha, head of global foreign exchange research at Calyon in London. "The concern is whether this has been generated by external factors and global growth or whether there is domestically led growth in Europe and the risk is that a lot of this growth is coming from the external side." He added the European Central Bank was unlikely to be in a hurry to cut interest rates in the light of the data. ECB chief Jean-Claude Trichet seemed to reinforce that view when he said on Friday recent data did not change the central bank's view on the economic outlook. "I have already said that we had confidence at our last meeting in Helsinki that we trust that the gradual recovery was materialising," he told reporters after a speech in Germany. "All the new information that we had in the last two, three days are confirming that we were right in our assessment of a gradual recovery."
MORE GROWTH NEEDED
Despite the pick up in growth, the euro zone economy is expanding more slowly than the U.S. Comparative data provided by Eurostat showed U.S. gross domestic product rose 1.0 percent in the first quarter compared with the previous three months and by 4.9 percent year-on-year. Economists said more strong data would be needed to confirm that an economic upturn was gathering momentum in the euro zone. They also predicted it would take a prolonged period of strong growth to solve budget problems in Germany and France, which are expected to flout EU budget rules for the third year running in 2004 and may break them again in 2005. "It is consistent with the strong numbers we have seen from national data but the jury is still out on whether this is the start of something new," said David Brown, chief economist at Bear Stearns International. "The bad news is that budget deficits are going to get bigger before they get smaller despite this growth." Economists said it would take a pick up in consumer demand to put the economic recovery on a more sustainable footing and that this could take some time to materialise given consumer morale was stagnant as job prospects had yet to improve.
"The weakest link is consumer demand and the problem is that euro zone employment prospects are as flat as a pancake right now," said Brown. The most recent Commission sentiment survey showed consumer sentiment was unchanged in April even as businesses turned more upbeat. Unemployment in the bloc has held at 8.8 percent for 13 months in a row.
GOOD NATIONAL DATA
National data had prompted economists to revise up their forecasts a day before the euro zone figures were released. The German economy grew at its fastest pace in three years as surging exports offset a drop in domestic demand. France expanded at its strongest rate since late 2000, while Italy grew at its fastest since the end of 2002. A poll conducted on Thursday showed the average prediction was for euro zone quarterly growth of 0.5 percent, up from a previous forecast of 0.4 percent, and annual growth of 1.1 percent instead of 1.0 percent. Growth data for the fourth quarter of 2003 was revised up to show a quarterly increase of 0.4 percent compared with the previous estimate of 0.3 percent. The annual rate of change was left unrevised at 0.6 percent. A breakdown by component for the first quarter data was not available. Full figures will be released in the coming weeks by Eurostat.////www.......com