Euro Area Growth Slows, Yet Solid In Q1; Tops Expectations, Tuesday, May 15, 2007 11:07:55 AM
The Euro zone economy logged robust growth in the first quarter, adding strength to the tightening stance of the European Central Bank.Preliminary estimates from the Eurostat revealed on Tuesday that the 13-nation economy grew 3.1% on year in the first quarter, slightly above the 3.0% expected. However, the pace of expansion slowed from 3.3% witnessed in the fourth quarter of 2006.
The first quarter Euro zone annual economic growth exceeded the corresponding US economic growth of 2.1%.
On a sequential basis, the euro zone economy expanded 0.6%, smaller than 0.9% in the previous quarter. The quarterly growth came in slightly above the 0.5% forecasted. The Euro zone quarterly growth rate is double that of the corresponding US number.
Germany remained the growth driver for the region. Earlier in the day, the Federal Statistical Office said the German economy expanded 0.5% on a sequential basis in the first quarter, exceeding forecasts of 0.3%. On a yearly basis, the economy logged a growth of unadjusted 3.3% in the first quarter compared to 3.7% in the prior quarter, revised up from 3.5% earlier. Economists expected a moderate growth of 2.6%.
The hike in the value added tax - VAT in the beginning of the year significantly hurt household spending, which acted as a drag on economic growth in the largest Euro zone economy. The Angela Merkel administration raised the VAT rate to 19% from 16%, effective January 1.
Earlier in the month, the European Commission raised the euro area 2007 growth forecast to 2.6% from 2.4%. The EC noted that the upward revision in outlook is partly due to solid growth in 2006, the strongest in six years. Growth remains driven by dynamic domestic demand and brisk investment growth. The growth rate for the euro zone is projected to ease to 2.5% in 2008. The EC attributed the slackening growth rate to sluggishness in external demand.
The European Commission expects the impact of the VAT hike to temporarily dampen housing investment in 2007 in the largest Euro zone economy, though less than earlier forecasted. The EC expects the negative impact of VAT hike on private consumption to be eclipsed by the impressive labor market recovery.
Elsewhere, French statistical office Insee reported that the nation`s economy grew 0.5% sequentially in the first quarter, the same pace as in the previous quarter. Economists were looking for a 0.7% expansion in the first quarter. The quarterly expansion of 0.5%, takes the yearly growth rate to 2.0%.
The EU27 region logged an economic growth of 0.6% sequentially versus 0.9% in the fourth quarter of 2006. On an annual basis, the economy grew 3.2% after 3.5% expansion in the prior quarter.
Last week, the ECB left its key interest rates unchanged for the second session in a row after a quarter point hike in March. The ECB held the minimum bid rate on the main refinancing operations at 3.75%.
The ECB President Jean-Claude Trichet stated that economic activity remains solid and broad based and expect them to be favorable in the medium-term. Trichet also signaled an imminent hike with his code words “strong vigilance”.
Separately, the European Commission projected GDP growth to remain solid in the second and third quarters, before loosing steam in the last quarter of the year. During the second quarter, growth is forecasted to be within the range of 0.4%-0.9%, unrevised from April. While, the growth forecast for the third quarter was revised to 0.4%-0.9% from 0.3%-0.9%.
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posted by Kalin Tasev @ 8:09 AM
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