Strong German and French performances drive eurozone growth

STORMING performances by the German and French economies propelled growth in the eurozone well above forecasts in the first quarter while also highlighting the yawning gap between the bloc’s strong and weak.

The 17-nation currency area expanded by 0.8% in the first three months of the year, data showed yesterday, fuelled by startling 1.5% German GDP growth with the French economy only a little off that pace, up by 1%.

Economists had forecast eurozone growth of 0.6% and analysts said the data — despite Portugal returning to recession and Greece still buried under a debt mountain — would do nothing to deter the European Central Bank from raising interest rates by July.

Germany and France account for nearly half the region’s gross domestic product. Both nations bounced back from a modest showing in the last quarter of 2010 when bad weather hit output.

The euro got a lift from the German numbers, jumping to a session high of $1.4299 in response.

“This is almost certainly as good as it gets for the euro zone and growth seems likely to moderate over the coming months,” said Howard Archer, economist at IHS Global Insight.

“Nevertheless, there now looks a very decent chance that euro zone GDP growth will reach 2.0% in 2011 for the first time since 2007.”

In a separate report, the European Commission forecast the eurozone will grow 1.6% this year with inflation well above the ECB’s 2% target.

Germany looks set to continue riding high.

A top economic adviser to the German government, Wolfgang Franz, told German TV channel ARD the country’s economy could expand by 3% or more this year.

Analysts were a little more downbeat about France, saying this was probably its high-water mark, with government cuts about to bite.

“This is likely as good as it gets,” said Joost Beaumont, economist at ABN-AMRO.

“The recent surge in oil prices is likely to erode household purchasing power, while also eating into company profits, leaving its mark on consumption and investment. Furthermore, we expect fiscal retrenchment to increasingly come to the fore.”

Italy bucked the trend, growing by just 0.1% in the first quarter, posting the same weak rate as the last three months of 2010. The government predicts growth of just 1.1% this year.

For the eurozone’s most debt-ridden economies, solid growth is a distant dream.

Portugal’s economy shrank 0.7% in the first quarter, sending the economy back into recession. Its government has admitted that, having sought a bailout, its economy will shrink both this year and next.