Euro zone GDP shows frailty as more austerity looms

By Brian Love

PARIS (BestGrowthStock) – The euro zone economy made a weak start to 2010 as paltry growth in powerhouses Germany and France weighed, while debt reduction efforts in the region’s weaker states look set to puncture hopes of faster expansion in coming quarters.

Economists predicted a better second quarter in which activity lost due to bad weather early in the year would be recouped.

But they said austerity measures being prepared by governments desperate to shrink bloated debts could compound growth weakness, notably in Spain — which announced $15 billion euros of fresh cuts over two years — Greece and Portugal.

Quarterly growth for the euro zone overall was 0.2 percent in the January-March period after a flat final quarter of 2009.

German GDP also grew 0.2 percent to mark a fourth straight quarter above zero. That was above forecast but lackluster next to the pace of post-recession recovery in the United States, not to mention the strength of China and other emerging market economies.

France, the euro zone’s second-largest economy after Germany, reported a 0.1 percent increase, falling short of expectations, and growth in the fourth quarter of 2009 was trimmed to 0.5 percent from 0.6 percent.

“Germany and the euro zone are likely to continue lagging the global economy and what we’re seeing in the United States,” said Joerg Zeuner, economist at VP bank.

On a more positive note for Germany if not the wider region, Commerzbank’s Joerg Kraemer said Germany’s export prowess left it well positioned to outperform the rest on the back of an upturn in global trade.

Others expect a broader second-quarter rebound as countries recoup the losses caused by harsh winter conditions at the start of the year, but remain cautious beyond that, given moves to shrink national deficits through spending cuts and tax hikes.

“Unfortunately, the outlook beyond the spring sprint is less rosy. Even if there are past examples of expansionary fiscal consolidation, austerity programmes in several euro zone countries will weigh on growth in the coming years,” said Carsten Brzeski, economist at ING financial Markets.

DANGER ON THE PERIPHERY

Most of the latest GDP reports were barebones estimates to be fleshed out in coming days but France’s fuller first readout gave some hint about trends: consumer spending, traditionally a big driver of activity there, fell flat in the first quarter, while the global trade upturn clearly helped, lifting exports 3.9 percent versus the last quarter of 2009.

Italy reported a 0.5 percent GDP rise for the January-March quarter, versus a final quarter of 2009 when GDP declined 0.1 percent.

The picture was mixed for the weakest economies of the euro zone periphery, which are under the heaviest pressure to pursue severe austerity programmes to control debts.

Spain, which accounts for more than 10 percent of total euro zone GDP and is the biggest of the economies hit particularly hard by the end of the credit boom and subsequent global economic plunge of 2007-2009, reported 0.1 percent growth — finally exiting recession after nearly two years of contraction.

After the figures, Prime Minister Jose Luis Rodriguez Zapatero, whose debt-stricken country was recently hit by a sharp rise in refinancing costs in the financial markets, announced further tough austerity measures to get public finances into better shape.

Greece, where the euro-weakening debt crisis of recent weeks erupted, reported a 0.8 percent GDP drop for the first quarter, which while bad was much less severe than the 1.4 percent drop forecasters had flagged for a country which is now reliant on outside aid, a first in the history of Europe’s monetary union.

Portugal, battling to counter a financial market perception that its debt-control difficulties are second only to Greece’s, announced a surprisingly strong GDP rise of 1.0 percent.

Total euro zone GDP contracted more than 4 percent last year, far more than a dip in U.S. GDP of around 2.4 percent, and the European Commission last week forecast a recovery which would raise GDP just 0.9 percent in 2010 and 1.5 percent in 2011, compared to U.S. rises of 2.8 percent and 2.5 percent.

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(Editing by Stephen Nisbet, John Stonestreet)

Euro zone GDP shows frailty as more austerity looms