Recovery gains no steam in Europe as France lags

Recovery gains no steam in Europe as France lags

May 15th, 2014 by Associated Press in Local - Breaking News


AP Business Writer

FRANKFURT, Germany - Europe's economy failed to gain any momentum in the first quarter, solidifying expectations that the European Central Bank will soon back fresh stimulus measures to shore up the recovery.

Eurostat, the EU's statistics office, said Thursday that the economy of the 18 countries that share the euro saw economic output grow by only 0.2 percent in the first quarter from the previous three-month period.

Though that marked the fourth straight quarter of expansion following the recession, the rise was below economists' expectations -- the consensus in the markets was for a 0.4 percent increase.

A large chunk of the blame for the underperformance can be placed on a flat performance in France, Europe's second largest economy behind Germany. Between them, the two make up roughly half of the eurozone economy.

France has lagged in reducing worker protections and cutting labor costs for business -- steps that have benefited other eurozone economies.

A dismal 1.4 percent contraction in the Netherlands and a 0.1 percent decline in Italy did not help, either.

Without a stellar 0.8 percent rise in Germany and a solid 0.4 percent improvement in Spain, there may not even have been any growth in the eurozone.

Tom Rogers, senior economic adviser to the EY eurozone forecast, said the numbers "should act as a wake-up call for any eurozone policy makers tempted towards complacency about the road to recovery."

"Stagnating output in Italy and France, two of the four largest economies, is in large part a result of deteriorating cost-competitiveness, while Germany and Spain continue to reap rewards from reform implemented either well before the crisis, or more recently," he added.

Thursday's figures are likely to strengthen arguments for the European Central Bank to cut interest rates and take further stimulus measure at its next meeting June 5. The markets certainly think so and the euro was down another 0.4 percent at $1.3665. A week ago, the euro was heading towards $1.40 for the first time in 2-1/2 years.

The ECB could cut its benchmark interest rate from what is already a record low of 0.25 percent. It could also impose a negative interest rate for money banks deposit at the central bank, a step aimed at increasing loans to households and businesses. The ECB could also purchase government or corporate bonds on financial markets to add to the supply of money in the economy.

All those steps could help increase an inflation rate of 0.7 percent, which is well below the ECB's goal of just under 2 percent. Low inflation makes it harder for indebted governments to reduce their burdens. It has also raised fears that the eurozone may fall into outright deflation, a crippling downward price spiral that kills growth and business investment.

"The debate over 'whether' to act is surely over and it is now just a question of 'how' to act," said James Ashley, chief European economist at RBC Capital Markets.